<PAGE>
As Filed with the Securities and Exchange Commission on February 14, 2000
Registration Nos. 33-33734 and 811-6057
================================================================================
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. 24 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 25 [X]
HSBC MUTUAL FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 634-2536
Steven R. Howard, Secretary
Paul, Weiss, Rifkind, Wharton & Garrison,
1285 Avenue of the Americas, 23rd Floor
New York, New York 10019
(Name and Address of Agent for Service)
--------------------------
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
[X] 75 days after filing pursuant to paragraph (a)
[_] on (April 30,1999) pursuant to paragraph (a) of Rule 485
--------------------------
- -This post-effective amendment no. 24 to the registration statement on Form N-1A
of HSBC Mutual Funds Trust (the "Trust") relates only to the Mid Cap Fund, a new
series of the Trust. The prospectus describing the Class A, Class B, Class C and
Institutional Class shares of the HSBC Mutual Funds series of the Trust included
in the post-effective amendment as filed pursuant to Rule 485(b) under the
Securities Act of 1933 on April 30, 1999 (File No. 333-33734) is hereby
incorporated by reference.
================================================================================
<PAGE>
HSBC Mutual Funds Trust Prospectus
HSBC Asset Management [LOGO]
Questions?
Call 1-800-634-2536 or your
Investment Representative.
HSBC2P0499
----------------------------------------------------
Mid Cap Fund
Managed by HSBC Asset Management (Americas) Inc.
April 30, 2000
----------------------------------------------------
An investment in the Fund is not a deposit of the bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The Securities and Exchange Commission has not approved or disapproved the
shares described in this prospectus or determined whether this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
<PAGE>
HSBC Mutual Funds Trust Prospectus Table of Contents
[LOGO]
<TABLE>
<CAPTION>
Risk/Return Summary and Fund Expenses
- ---------------------------------------------------------------
<C> <S>
Carefully 4 Mid Cap Fund
review this
important
section, which
summarizes
each Fund's
investments,
risks, past
performance,
and fees.
[LOGO]
<CAPTION>
Investment Objectives, Strategies and Risks
- ---------------------------------------------------------------
Review this <C> <S>
section for 7 Mid Cap Fund
information on
investment
strategies and
their risks.
[LOGO]
<CAPTION>
Fund Management
- ---------------------------------------------------------------
Review this <C> <S>
section for 10 The Investment Adviser
details on the 10 Portfolio Managers
people and 10 The Distributor and Administrator
organizations
who oversee
the Funds. [LOGO]
<CAPTION>
Shareholder Information
- ---------------------------------------------------------------
Review this <C> <S>
section for 12 Pricing of Fund Shares
details on how 13 Purchasing and Adding to Your
shares are Shares
valued, how to 17 Selling Your Shares
purchase, sell 21 Distribution Arrangements/Sales
and exchange Charges
shares, 28 Exchanging Your Shares
related 30 Dividends, Distributions and
charges and Taxes
payments of
dividends and
distributions.
[LOGO]
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------
<C> <S>
[LOGO]
<CAPTION>
Back Cover
- ---------------------------------------------------------------
<C> <S>
Where to learn more about this
Fund
</TABLE>
2
<PAGE>
Risk/Return Summary and Fund Expenses
[LOGO]
The following is a summary of certain key information about the Mid Cap Fund.
You will find additional information about the Fund, including a detailed
description of the risks of an investment in the Fund, after this summary.
The Fund offers three different classes of shares; Class A, Class B and Class
C. All classes of shares are offered in this prospectus.
The Risk/Return Summary describes certain kinds of risks that apply to the
Fund. These risks are:
. Capitalization Risk. Investments in mid-capitalization companies involve
greater risk than is customarily associated with larger more established
companies due to the greater business risks of small size, limited markets
and financial resources, narrow product lines and frequent lack of depth of
management.
. Foreign Risk. The Fund may invest in both sponsored and unsponsored ADR
programs. Investments in ADRs involve certain risks not typically involved
in purely domestic investments, including future foreign political and
economic developments, and the possible imposition of foreign governmental
laws or restrictions applicable to such investments. Securities of foreign
issuers through ADRs re subject to different economic, financial, political
and social factors. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resources, self-
sufficiency and balance of payments position. With respect to certain
countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect the value of the particular ADR.
There may be less publicly available information about a foreign company
than about a U.S. company, and there may be less governmental regulation
and supervision of foreign stock exchanges, brokers and listed companies.
In addition, such companies may use different accounting and financial
standards (and certain currencies may become unavailable for transfer from
a foreign currency), resulting in a Fund's possible inability to convert
proceeds realized upon the sale of portfolio securities of the affected
foreign companies immediately into U.S. currency.
. Management Risk. Risk that the strategy used by the investment management
team may fail to produce the desired results.
. Market Risk. Risk that the value of the Fund's investments will fluctuate
as the stock market fluctuates and that stock prices overall may decline
over short or longer-term periods.
. Security-Specific Risk. Risk that the issuer will be unable to achieve its
earnings or growth expectations.
Other important things for you to note:
. You may lose money by investing in the Fund.
. Because the value of the Fund's investments will fluctuate with market
conditions, so will the value of your investment in the Fund.
3
<PAGE>
Risk/Return Summary and Fund Expenses
[LOGO]
Mid Cap Fund
Investment The Fund's investment objective is to achieve a higher rate
Objective of return than that generated by the S&P 400. The Fund seeks
to achieve its objective by investing in common or preferred
stocks and convertible securities.
Principal The Fund normally invests at least 65% of its total assets
Investment in equity securities of mid-sized companies with market
Strategies capitalization falling within the S&P 400 Index at the time
of acquisition. Investments are primarily in common stocks
but also may include preferred stocks and convertible
securities. The Fund's Adviser selects stocks that have
attractive valuation, the potential for future earnings
growth and in the Adviser's opinion are likely to outperform
the S&P 400. In selecting securities the Adviser uses
quantitative and fundamental research to identify stocks
meeting its criteria. Investment will be sold if they no
longer meet the Fund's criteria for growth-oriented
instruments.
Principal The principal risks of investing in the Fund are
Investment Risks capitalization risk, market risk, security-specific risk,
foreign investment risk and management risk. Additionally,
there is the risk that stocks selected because they
represent value will remain undervalued or out-of-favor.
Who may want to Consider investing in the Fund if you are:
invest? . seeking a long-term goal such as retirement
. looking to add a mid-cap growth component to your
portfolio
. willing to accept higher risks of investing in the stock
market
This Fund will not be appropriate for anyone:
. seeking monthly income
. pursuing a short-term goal or investing emergency
reserves
. seeking safety of principal
4
<PAGE>
<TABLE>
<CAPTION>
Risk/Return Summary and Fund Expenses
[LOGO]
Mid Cap Fund
Fees and Expenses
<S> <C> <C>
Shareholder Transaction
As an investor in Expenses
the Fund, you (fees paid
will pay the by you directly) A Shares B Shares C Shares
following fees
and expenses.
Maximum sales charge
Shareholder (load) on purchases 5.00%/1/ None None
transaction fees ------------------------------------------------------
are paid from Maximum deferred sales
your account. charge (load) None 4.00%/2/ 1.00%/3/
Annual operating ------------------------------------------------------
expenses are paid
out of Fund
assets, and are
reflected in the
share price.
Contingent De-ferred Sales Annual Fund Operating A Shares B Shares C Shares
Expenses Charge
(fees paid from Fund assets)
Some share Management fee % % %
classes impose a ---------------------------------------------------------
back end sales Administrative Services
charge (load) if fee/4/ .15% .15% .15%
you sell your ---------------------------------------------------------
shares before a Distribution (12b-1)
certain period of fee/5/ .50% .75% .75%
time has elapsed. ---------------------------------------------------------
This is called Service Organization
a Contingent fee/6/ .35% .50% .50%
Deferred Sales ---------------------------------------------------------
Charge. Other expenses % % %
---------------------------------------------------------
Total fund operating
expenses % % %
---------------------------------------------------------
Fee waivers/4/,/5/,/6/ % % %
---------------------------------------------------------
Net expense/7/ % % %
---------------------------------------------------------
</TABLE>
- ------
/1/Lower sales charges are available depending upon the amount invested.
/2/A CDSC on Class B shares declines over four years starting with year one and
ending in year five from: 4%, 3%, 2%, 1%, and 0%.
/3/A CDSC of 1% applies to redemptions of Class C shares within the first year.
/4/The Administrator is contractually limiting its Administrative Services fee
to .10% for each class of shares.
/5/The Distributor is contractually waiving .25% of its Distribution fee for
Class A shares.
/6/The Service Organization fee is being contractually waived in its entirety
for Class A shares and contractually limited to .25% for the Class B and
Class C shares.
/7/The contractual expense limitations are in effect through April 30, 2001.
5
<PAGE>
Risk/Return Summary and Fund Expenses
[LOGO]
A
Mid Cap Fund
Expense Example
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Class A Shares
Assuming redemption $ $
----------------------------------
Class B Shares
Assuming redemption $ $
Assuming no redemption $ $
----------------------------------
Class C Shares
Assuming redemption $ $
Assuming no redemption $ $
----------------------------------
</TABLE>
Use this table to
compare fees and
expenses with those
of other Funds.
It illustrates the
amount of fees and
expenses you would
pay, assuming
the following:
. $10,000
investment
. 5% annual return
. no changes in the
Fund's operating
expenses
except the
expiration of the
current
contractual fee
waiver on April
30, 2001.
Because this example
is hypothetical and
for comparison only,
your actual costs
will be different.
6
<PAGE>
Investment Objectives, Strategies and Risk
[LOGO]
A
Mid Cap Fund
Ticker Symbol: Class A Class B Class C
This section of the Prospectus provides a more complete description of the
principal investment objectives and policies of the Fund. Of course, there can
be no assurance that the Fund will achieve its investment objective. Additional
descriptions of the Fund's risks, strategies, and investments, as well as other
strategies and investments not described below, may be found in the Fund's
Statement of Additional Information or SAI.
Investment Objective, Policies And Strategy
The Fund's investment objective is to achieve a higher rate of return than that
generated by the S&P 400. The Fund seeks to achieve its objectives by investing
in common stock, preferred stocks and convertible securities. Under normal
conditions the Fund will invest at least 65% of its total assets in equity
securities of mid-sized companies with market capitalizations falling within
the S&P 400 Index at the time of acquisition.
The Adviser uses quantitative and fundamental research to select stocks for the
Fund's portfolio that the Adviser believes offer attractive growth
opportunities and are selling at reasonable prices. The Adviser pursues this
strategy by first considering fundamental factors such as book value, cash
flow, earnings, and sales. The Adviser's quantitative analysis also includes
in-depth analysis of a company's financial statements. Once a company passes
this quantitative screening process, the Adviser utilizes a more traditional
qualitative approach. This analysis considers factors such as liquidity, use of
leverage, management strength, and the company's ability to execute its
business plan. The Fund expects to invest primarily in securities of U.S.-based
companies, but it may also invest in securities of non-U.S. companies,
generally through ADRs. The Adviser will consider selling those securities
which no longer meet the Fund's criteria for investing. The Fund has authority
to invest up to 100% of its total assets in a variety of short-term debt
securities for temporary defensive purposes under unusual market conditions.
While the Fund is invested in these instruments, it will not be pursuing its
investment objective.
The Fund may invest up to 35% of its total assets in fixed income securities
and money market instruments. The fixed income securities may include U.S.
Government securities, corporate bonds, asset-backed securities (including
mortgage-backed securities), obligations of savings and loans and U.S. and
foreign banks, commercial paper and related repurchase agreements. The Fund
will not purchase corporate debt securities rated below Baa by Moody's
Investors Service ("Moody's") or BBB by Standard & Poor's Corporation ("S&P").
The Fund's criteria for selecting equity securities are the issuer's managerial
strength, competitive position, price to earnings ratio, profitability,
prospects for growth, underlying asset value and relative market value. The
Fund's Adviser uses quantitative and fundamental research to identify stocks
meeting either or both growth and income criteria and selects securities for
the portfolio that appear to be undervalued. The Fund may invest in securities
that appear to be undervalued because the value or potential for growth has
been overlooked by many investors or because recent changes in the economy,
industry or the company have not yet been reflected in the price of the
securities. In order to increase the Fund's portfolio income, the Fund may
invest in securities that provide current dividends or, in the opinion of the
Adviser, have a potential for dividend growth in the future. Investments will
be sold if they no longer meet the Fund's criteria for growth-oriented
instruments.
7
<PAGE>
Investment Objectives, Strategies and Risk
[LOGO]
A
Risk Considerations
The principal risks of investing in the Fund are capitalization risk, foreign
risk, market risk, security specific risk and management risk. Capitalization
risk is the risk customarily associated with investments in smaller
capitalization companies due to limited markets and financial resources, narrow
product lines and frequent lack of depth of management. Stocks of smaller
companies may trade infrequently or in lower volumes, making it difficult for
the Fund to sell its shares at the desired price. Smaller companies may be more
sensitive to changes in the economy overall. Historically, small company stocks
have been more volatile than those of larger companies. As a result, the Fund's
net asset value may be subject to rapid and substantial changes. Market risk is
the possibility that the Fund's net asset value will decline with changes in
the market value of the Fund's portfolio securities. The Fund's investments
represent proportionate interests in the issuing companies. Therefore, the Fund
participates in the success or failure of any company in which it holds stock.
The market value of common stock can fluctuate significantly, reflecting the
business performance of the issuing company, investor perception and general
economic or financial market movements. There is also the risk that the issuer
will be unable to achieve its earnings or growth expectations or that the
strategy used by the investment management team may fail to produce the desired
results.
ADRs are U.S. dollar-denominated receipts generally issued by domestic banks,
which evidence the deposit with the bank of the common stock of a foreign
issuer and which are publicly traded on exchanges or over-the-counter in the
United States. The Fund may invest in both sponsored and unsponsored ADR
programs. There are certain risks associated with investments in unsponsored
ADR programs. Because the non-U.S. company does not actively participate in the
creation of the ADR program, the underlying agreement for service and payment
will be between the depository and the shareholder. In an unsponsored ADR
program, there also may be several depositories with no defined legal
obligations to the non-U.S. company. In addition, with respect to all ADRs
there is always the risk of loss due to currency fluctuations.
Investments in ADRs involve certain risks not typically involved in purely
domestic investments, including future foreign political and economic
developments, and the possible imposition of foreign governmental laws or
restrictions applicable to such investments. Securities of foreign issuers
through ADRs are subject to different economic, financial, political and social
factors. Individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. With respect to certain countries, there is the possibility
of expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could adversely affect the value
of the particular ADR. There may be less publicly available information about a
foreign company than about a U.S. company, and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. In addition, such companies may use different accounting and
financial standards (and certain currencies may become unavailable for transfer
from a foreign currency), resulting in a Fund's possible inability to convert
proceeds realized upon the sale of portfolio securities of the affected foreign
companies immediately into U.S. currency.
8
<PAGE>
Investment Objectives, Strategies and Risk
[LOGO]
A
Other Considerations--All Funds
Portfolio Turnover. The Fund is actively managed and, in some cases the Fund's
portfolio turnover, may exceed 100%. A higher rate of portfolio turnover
increases brokerage and other expenses, which must be borne by the Fund and its
shareholders. High portfolio turnover (over 100%) also may result in the
realization of substantial net short-term capital gains, which when distributed
are taxable to shareholders.
Temporary Defensive Positions. In order to meet liquidity needs or for
temporary defensive purposes, the Fund may invest up to 100% of its assets in
fixed income securities, money market securities, certificates of deposit,
bankers' acceptances, commercial paper or in equity securities which in the
Adviser's opinion are more conservative than the types of securities that the
Fund typically invests in. To the extent the Fund is engaged in temporary or
defensive investments, the Fund will not be pursuing its investment objective.
9
<PAGE>
Fund Management
[LOGO]
A
The Investment Adviser
HSBC Asset Management Americas Inc. (HSBC or the "Adviser"), 140 Broadway, New
York, NY 10005 is the adviser for the Fund. HSBC manages more than $3.3 billion
of assets of individuals, pension plans, corporations and institutions. Through
its portfolio management team, HSBC makes the day-to-day investment decisions
and continuously reviews, supervises and administers the Fund's investment
programs.
For these advisory services, the Fund will pay the Adviser % based on the
Funds average net assets:
Portfolio Managers
The HSBC Asset Management (Americas) Inc. US Equities team is led by Mr.
Fredric Lutcher III, CFA, Chief Investment Officer, U.S. Equities. Mr. Thomas
D'Auria, CFA, Portfolio Manager is responsible for the day-to-day management of
the Mid-Cap Fund. Prior to joining the Adviser in late 1997, Mr. D'Auria worked
as Vice President and Senior Fund Analyst at Merrill Lynch Asset Management for
four years. The U.S. Equity team consists of 12 analysts, managers and dealers
who provide investment support for the fund.
The Distributor and Administrator
BISYS Fund Services ("BISYS"), whose address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035, serves as the Fund's administrator. Management and
administrative services of BISYS include providing office space, equipment and
clerical personnel to the Funds and supervising custodial, auditing, valuation,
bookkeeping, legal and dividend dispersing services.
BISYS also serves as the distributor of Fund shares. BISYS may provide
financial assistance in connection with pre-approved seminars, conferences and
advertising to the extent permitted by applicable state or self-regulatory
agencies, such as the National Association of Securities Dealers.
The Statement of Additional Information has more detailed information about the
Investment Adviser and other service providers.
10
<PAGE>
Fund Management
[LOGO]
A
Year 2000
Like other funds and business organizations around the world, the Fund could be
adversely affected if the computer systems used by the Adviser and the Fund's
other service providers do not properly process and calculate date-related
information for the Year 2000 and beyond. In addition, the Year 2000 problem
may adversely affect the companies in which the Fund invests, particularly
since the Fund invests outside of the U.S. For example, these companies may
incur substantial costs to correct the problem and may suffer losses caused by
data processing errors. Since the ultimate costs or consequences of incomplete
or untimely resolution of the Year 2000 problem by the Fund's service providers
are unknown to the Fund at this time, no assurance can be made that such costs
or consequences will not have a material adverse impact on the Fund or its
service providers. The Fund and the Adviser will continue to monitor
developments relating to the Year 2000 problem.
11
<PAGE>
Shareholder Information
[LOGO]
Pricing of Fund Shares
- ---------------------
How NAV is Calculated
Per share net asset value (NAV) is determined and its
The NAV is shares are priced at the close of regular trading on
calculated by adding the New York Stock Exchange, normally at 4:00 p.m.
the total value of a Eastern time on days the Exchange is open. Fund shares
Fund's investments will not be priced on days the New York Stock Exchange
and other assets, is closed for trading.
subtracting its
liabilities and then Some of the Fund's investments may be in securities
dividing that figure that are primarily listed on foreign exchanges and
by the number of trade on weekends or other days when the Fund does not
outstanding shares price its shares. As a result, the Fund's NAVs may
of the Fund: change on days when shareholders will be unable to
purchase or redeem the Funds' shares.
NAV =
Total Assets- Your order for purchase, sale or exchange of shares is
Liabilities priced at the next NAV calculated after your order is
------------- accepted by the Fund less any applicable sales charge
Number of Shares as noted in the section on "Distribution
Outstanding Arrangements/Sales Charges." This is what is known as
the offering price.
You can find the
Fund's NAV daily in The Fund's securities are generally valued at current
The Wall Street market prices. If market quotations are not available,
Journal and other prices will be based on fair value as determined by the
newspapers. Fund's Trustees.
- --------------------- --------------------------------------------------------
12
<PAGE>
Shareholder Information
[LOGO]
A
Purchasing and Adding To Your Shares
You may purchase
shares of the Fund
through the
Distributor or
through banks,
brokers and other
investment
representatives, who
may charge
additional fees and
may require higher
minimum investments
or impose other
limitations on
buying and selling
shares. If you
purchase shares
through an
investment
representative, that
party is responsible
for transmitting
orders by close of
business and may
have an earlier cut-
off time for
purchase and sale
requests. Consult
your investment
representative or
institution for
specific
information.
<TABLE>
<CAPTION>
Minimum Minimum
Initial Subsequent
Account type Investment Investment
<S> <C> <C>
Class A, B, or C
Regular $1,000 $50
-------------------------------------------
Automatic Investment Plan $50 $50
-------------------------------------------
</TABLE>
All purchases must be in U.S. dollars. A fee will be
charged for any checks that do not clear. Third-party
checks are not accepted.
- --------------------------------------------------------------------------------
The Fund may waive its minimum purchase requirement and the Distributor may
reject a purchase order if it considers it in the best interest of the Fund and
its shareholders.
There are no minimum investment requirements with respect to investments
effected through certain automatic purchase and redemption arrangements on
behalf of customer accounts maintained at Service Organizations. The minimum
investment requirements may be waived or lowered for investments effected on a
group basis by certain other institutions and their employees, such as pursuant
to a payroll deduction plan. All funds will be invested in full and fractional
shares.
- --------------------------------------------------------------------------------
Avoid 31% Tax Withholding
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
- --------------------------------------------------------------------------------
13
<PAGE>
Shareholder Information
[LOGO]
A
Purchasing and Adding To Your Shares
By Regular Mail
If purchasing through your financial advisor or brokerage account, simply tell
your advisor or broker that you wish to purchase shares of the Fund and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
All investments made by regular mail or express delivery, whether initial or
subsequent, should be sent to:
<TABLE>
<CAPTION>
By Regular Mail: By Express Mail:
<S> <C>
HSBC Family of Funds HSBC Family of Funds
PO Box 163850 3435 Stelzer Road
Columbus, OH 43216-3850 Columbus, OH 43219
</TABLE>
Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to "HSBC Family of Funds."
3. Mail or deliver application and payment to the address above.
Subsequent Investments:
1. Use the investment slip attached to your account statement. Or, if
unavailable, provide the following information:
. Fund
. Amount invested
. Account name and number
2. Make check, bank draft or money order payable to "HSBC Family of Funds".
3. Mail or deliver investment slip and payment to the address above.
14
<PAGE>
Shareholder Information
[LOGO]
A
Purchasing and Adding To Your Shares
Electronic Purchases
Your bank must participate in the Automated Clearing House (ACH) and must be a
United States Bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call 1-800-
634-2536. Your account can generally be set up for electronic purchases within
15 days.
Call 1-800-634-2536 to arrange a transfer from your bank account.
Electronic vs. Wire Transfer
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH) and may take up to eight days to
clear. There is generally no fee for ACH transactions.
By Wire Transfer
Telephone the Transfer Agent at 1-800-634-2536 for instructions. Please note
your bank will normally charge you a fee for handling this transaction.
You can add to your account by using the following convenient options. The Fund
reserves the right to change or eliminate these privileges at any time with 60
days notice.
15
<PAGE>
Shareholder Information
[LOGO]
Purchasing And Adding To Your Shares
Automatic Investment Plan Directed Dividend Option
You can make automatic investments in By selecting the appropriate box in
the Fund from your bank account, the Account Application, you can
through payroll deduction or from your elect to receive your distributions
federal employment, Social Security or in cash (check) or have
other regular government checks. distributions (capital gains and
Automatic investments can be as little dividends) reinvested in another
as $50, once you've invested the $1000 HSBC Fund without a sales charge.
minimum required to open the account. You must maintain the minimum
balance in each Fund into which you
To invest regularly from your bank plan to reinvest dividends or the
account: reinvestment will be suspended and
your dividends paid to you. The Fund
. Complete the Automatic Investment may modify or terminate this
Plan portion on your Account reinvestment option without notice.
Application. You can change or terminate your
Make sure you note: participation in the reinvestment
- Your bank name, address and option at any time.
account number --------------------------------------
- The amount you wish to invest
automatically (minimum $50)
- How often you want to invest
(every month, 4 times a year,
twice a year or once a year)
. Attach a voided personal check.
To invest regularly from your paycheck
or government check:
Call 1-800-634-2536 for an enrollment
form.
- --------------------------------------------------------------------------------
Dividends and Distributions
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Dividends are higher for Class A shares than for Class B and C shares, because
Class A shares have lower distribution expenses. Capital gains are distributed
at least annually.
Distributions are made on a per share basis regardless of how long you've owned
your shares. Therefore, if you invest shortly before the distribution date,
some of your investment will be returned to you in the form of a distribution.
- --------------------------------------------------------------------------------
16
<PAGE>
Shareholder Information
[LOGO]
Selling Your Shares
You may sell Withdrawing Money From Your Fund Investment
your shares at
any time. Your As a mutual fund shareholder, you are technically selling
sales price will shares when you request a withdrawal in cash. This is also
be the next NAV known as redeeming shares or a redemption of shares.
after your sell
order is -------------------------------------------------------------
received by the
Fund, its Contingent Deferred Sales Charge
transfer agent,
or your When you sell Class B or Class C shares, you will be charged
investment a fee for any shares that have not been held for a
representative. sufficient length of time. These fees will be deducted from
Normally you the money paid to you. See the section on "Distribution
will receive Arrangements/Sales Charges" on page 31 for details.
your proceeds
within a week -------------------------------------------------------------
after your
request is Instructions For Selling Shares
received.
If selling your shares through your financial adviser or
broker, ask him or her for redemption procedures. Your
adviser and/or broker may have transaction minimums and/or
transaction times which will affect your redemption. For all
other sales transactions, follow the instructions below.
By telephone 1. Call 1-800-634-2536 with instructions as to how you wish
(unless you have to receive your funds (mail, wire, electronic transfer).
declined
telephone sales
privileges on
your latest
application)
- --------------------------------------------------------------------------------
By mail 1. Call 1-800-634-2536 to request redemption forms or write
(See "Selling a letter of instruction indicating:
Your Shares-- . your Fund and account number
Redemptions in . amount you wish to redeem
Writing . address where your check should be sent
Required") . account owner signature
2. Mail to:
HSBC Family of Funds
PO Box 163850
Columbus, OH 43216-3850
- --------------------------------------------------------------------------------
By express See instruction 1 above.
delivery service
(See "Selling 2. Send to
Your Shares-- HSBC Family of Funds
Redemptions in co/BISYS Fund Services
Writing Attn: T.A. Operations
Required") 3435 Stelzer Road
Columbus, OH 43219
17
<PAGE>
Shareholder Information
[LOGO]
A
Selling Your Shares
Wire transfer Call 1-800-634-2536 to request a wire transfer.
You must If you call in your redemption request of $1000 or more by 4
indicate this p.m. Eastern time, your payment will normally be wired to
option on your your bank on the next business day.
application.
Your financial
institution may
charge a wire
transfer fee.
- --------------------------------------------------------------------------------
Electronic Call 1-800-634-2536 to request an electronic redemption.
Redemptions
If you call by 4 p.m. Eastern time, the NAV of your shares
Your bank must will normally be determined on the same day and the proceeds
participate in credited within 7 days.
the Automated
Clearing House
(ACH) and must
be a U.S. bank.
Your bank may
charge for this
service.
- --------------------------------------------------------------------------------
Systematic Withdrawal Plan
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $50. To activate this
feature:
. Make sure you've checked the appropriate box on the Account Application. Or
call 1-800-634-2536.
. Include a voided personal check.
. Your account must have a value of $10,000 or more to start withdrawals.
. If the value of your account falls below $500, you may be asked to add
sufficient funds to bring the account back to $500, or the Fund may close
your account and mail the proceeds to you.
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Shareholder Information
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Selling Your Shares
Redemptions In Writing Required
You must request redemption in writing in the following situations:
1.Redemption requests requiring a signature guarantee which include each of the
following:
. Redemptions over $5,000
. Your account registration or the name(s) in your account has changed within
the last 30 days
. The check is not being mailed to the address on your account
. The check is not being made payable to the owner of the account
. The redemption proceeds are being transferred to another Fund account with
a different registration.
A signature guarantee can be obtained from a financial institution, such as a
bank, broker-dealer, or credit union, or from members of the STAMP
(Securities Transfer Agents Medallion Program), MSP (New York Stock Exchange
Medallion Signature Program) or SEMP (Stock Exchanges Medallion Program).
Members are subject to dollar limitations which must be considered when
requesting their guarantee. The Transfer Agent may reject any signature
guarantee if it believes the transaction would otherwise be improper.
Verifying Telephone Redemptions
The Fund makes every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your
protection and you will be asked for information to verify your identity. Given
these precautions, unless you have specifically indicated on your application
that you do not want the telephone redemption feature, you may be responsible
for any fraudulent telephone orders. If appropriate precautions have not been
taken, the Transfer Agent may be liable for losses due to unauthorized
transactions. Telephone redemption privileges will be suspended for a 30-day
period following a telephone address change.
Redemptions Within 15 Days of Initial Investment
When you have made your initial investment by check, payment on redemption
requests will be delayed until the Transfer Agent is reasonably satisfied that
the check has cleared (which may require up to 15 days from purchase date). You
can avoid this delay by purchasing shares with a certified check.
Refusal Of Redemption Request
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
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Shareholder Information
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Selling Your Shares
Redemption In Kind
The Fund reserves the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund
operations (for example, more than 1% of the Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind will
consist of securities equal in market value to your shares. When you convert
these securities to cash, you will pay brokerage charges.
Closing Of Small Accounts
If your account falls below $500, the Fund may ask you to increase your
balance. If it is still below $500 after 30 days, the Fund may close your
account and send you the proceeds at the current NAV.
Undeliverable Redemption Checks
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be considered void. The check will be
canceled and the money reinvested in the Fund.
20
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Shareholder Information
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A
Distribution Arrangements/Sales Charges
The Fund offers investors a choice among multiple classes of shares with
different sales charges and expenses. In selecting which class of shares to
purchase, you should consider, among other things, (i) the length of time you
expect to hold your investment, (ii) the amount of any applicable sales charge
imposed at the time of redemption and Rule 12b-1 fees, as noted below, (iii)
whether you qualify for any reduction or waiver of any applicable sales charge,
(iv) the various exchange privileges among the different classes of shares and
(v) the fact that Class B shares automatically convert to Class A shares after
six years. The Class A, Class B and Class C shares are offered in this
Prospectus.
This section describes the sales charges and fees you will pay as an investor
in different share classes offered by the Fund and ways to qualify for reduced
sales charges.
<TABLE>
<CAPTION>
Class A Class B Class C
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Charge (Load) Front-end sales No front-end sales No front-end sales
charge; reduced sales charge. A contingent charge. A contingent
charges available. deferred sales charge deferred sales charge
(CDSC) may be imposed (CDSC) may be imposed
on shares redeemed on shares redeemed
within four years within one year after
after purchase; purchase.
shares automatically
convert to Class A
shares after 6 years.
- ---------------------------------------------------------------------------------------------
Distribution (12b-1) Fee Subject to annual Subject to annual Subject to annual
distribution fee of distribution fee of distribution fee of
up to .50% of the up to .75% of the up to .75% of the
Fund's net assets. Fund's net assets. Fund's net assets.
- ---------------------------------------------------------------------------------------------
Service Organization Fee Subject to annual fee Subject to annual Subject to annual
of up to .35% of the Service Organization Service Organization
Fund's net assets.* fee of up to .50% of fee of up to .50% of
the Fund's net the Fund's net
assets.* assets.*
- ---------------------------------------------------------------------------------------------
Fund Expenses Lower annual expenses Higher annual Higher annual
than Class B or C expenses than Class A expenses than Class A
shares. shares. shares.
- ---------------------------------------------------------------------------------------------
</TABLE>
* The Service Organization fee is being contractually waived for Class A shares
and contractually limited to .25% for Class B and Class C shares.
21
<PAGE>
Shareholder Information
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A
Distribution Arrangements/Sales Charges
Calculation Of Sales Charges
Class A Shares
This section describes the sales charges and fees you will pay as an investor
in the Funds and ways to qualify for reduced sales charges.
Shares are sold at their public offering price. This price includes the net
asset value plus the initial sales charge. Therefore, part of the money you
invest will be used to pay the sales charge. The remainder is invested in Fund
shares. The sales charge decreases with larger purchases. There is no sales
charge on reinvested dividends and distributions.
The current sales charge rates are as follows:
<TABLE>
<CAPTION>
Sales Charge Sales Charge
As A % Of As A % Of
Your Investment Offering Price Your Investment
- ---------------------------------------------------------
<S> <C> <C>
Up to $49,999 5.00% 5.26%
- ---------------------------------------------------------
$50,000 up to $99,999 4.50% 4.71%
- ---------------------------------------------------------
$100,000 up to $249,999 3.75% 3.90%
- ---------------------------------------------------------
$250,000 up to $499,999 2.50% 2.56%
- ---------------------------------------------------------
$500,000 up to $999,999 2.00% 2.04%
- ---------------------------------------------------------
$1,000,000 and above 1.00% 1.01%
- ---------------------------------------------------------
</TABLE>
22
<PAGE>
Shareholder Information
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A
Distribution Arrangements/Sales Charges
Class B and Class C Shares
Class B and C shares are offered at NAV, without any up-front sales charge.
Therefore, all the money you invest is used to purchase Fund shares. However,
if you sell your Class B shares of the Fund before the fourth anniversary of
purchase, you will have to pay a contingent deferred sales charge at the time
of redemption. If you sell your Class C shares before the first anniversary of
purchase, you will pay a 1% CDSC at the time of redemption. The CDSC will be
based upon the lower of the NAV at the time of purchase or the NAV at the time
of redemption according to the schedule below. There is no CDSC on reinvested
dividends or distributions.
Class B Shares
<TABLE>
<CAPTION>
CDSC as a % of Dollar
Years Since Purchase Amount Subject to Charge
- ---------------------------------------------------
<S> <C>
0-1 4.00%
- ---------------------------------------------------
1-2 3.00%
- ---------------------------------------------------
2-3 2.00%
- ---------------------------------------------------
3-4 1.00%
- ---------------------------------------------------
more than 4 None
- ---------------------------------------------------
</TABLE>
If you sell some but not all of your Class B or C shares, certain shares not
subject to the CDSC (i.e., shares purchased with reinvested dividends) will be
redeemed first, followed by shares subject to the lowest CDSC (typically shares
held for the longest time).
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<PAGE>
Shareholder Information
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A
Distribution Arrangements/Sales Charges
The Class B CDSC is paid to the Distributor to reimburse expenses incurred in
providing distribution-related services to the Fund in connection with the sale
of Class B shares. Although Class B shares are sold without an initial sales
charge, the Distributor normally pays a sales commission of the purchase price
of Class B shares to the dealer from its own resources at the time of the sale.
The Distributor and its agents may assign their right to receive any Class B
CDSC, certain distribution and service organization fees, to an entity that
provides funding for up-front sales commission payments.
Class C Shares
There is no sales charge imposed upon purchases of Class C shares, but
investors may be subject to a CDSC. Specifically, if you redeem Class C shares
of the Fund, your redemption may be subject to a 1.00% CDSC if the shares are
redeemed less than one year after the original purchase of the Class C shares.
The CDSC will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. Unlike Class B shares,
Class C shares do not convert to Class A shares.
Conversion Feature--Class B Shares
. Class B shares automatically convert to Class A shares of the same Fund
after six years from the end of the month of purchase.
. After conversion, your shares will be subject to the lower distribution and
shareholder servicing fees charged on Class A shares which will increase
your investment return compared to the Class B shares.
. You will not pay any sales charge or fees when your shares convert, nor
will the transaction be subject to any tax.
. If you purchased Class B shares of one Fund which you exchanged for Class B
shares of another Fund, your holding period will be calculated from the
time of your original purchase of Class B shares. The dollar value of Class
A shares you receive will equal the dollar value of the Class B shares
converted.
24
<PAGE>
Shareholder Information
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Distribution Arrangements/Sales Charges
Sales Charge Reductions
Class A Shares
Reduced sales charges are available to shareholders with investments of $50,000
or more. In addition, you may qualify for reduced sales charges under the
following circumstances.
. By initially investing a minimum of $1,000 and informing the Fund in
writing that you intend to purchase enough shares over a 13-month period to
qualify for a reduced sales charge.
. Rights of Accumulation. When the value of shares you already own plus the
amount you intend to invest reaches the amount needed to qualify for
reduced sales charges, your added investment will qualify for the reduced
sales charge.
Sales Charge Waivers
Class A Shares
The following qualify for waivers of sales charges:
. Shares purchased by investment representatives through fee-based investment
products or accounts.
. Proceeds from redemptions from another mutual fund complex within 90 days
after redemption, if you paid a front end sales charge for those shares.
. Reinvestment of distributions from a deferred compensation plan, agency,
trust, or custody account that was maintained by the Adviser or its
affiliates or invested in any HSBC Fund.
. Shares purchased for trust or other advisory accounts established with the
Adviser or its affiliates.
. Shares purchased by directors, trustees, employees, and family members of
the Adviser and its affiliates and any organization that provides services
to the Funds; retired Fund trustees; dealers who have an agreement with the
Distributor; and any trade organization to which the Adviser or the
Administrator belongs.
25
<PAGE>
Shareholder Information
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A
Distribution Arrangements/Sales Charges
Class B Shares and Class C Shares
The CDSC will be waived under certain circumstances, including the following:
. Distributions from retirement plans if the distributions are made following
the death or disability of shareholders or plan participants.
. Redemptions from accounts other than retirement accounts following the
death or disability of the shareholder.
. Returns of excess contributions to retirement plans.
. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan.
. Shares issued in a plan of reorganization sponsored by the Adviser, or
shares redeemed involuntarily in a similar situation.
Reinstatement Privilege
If you have sold shares and decide to reinvest in the Fund within a 60 day
period, you will not be charged the applicable sales load on amounts up to the
value of the shares you sold. You must provide a written reinstatement request
and payment within 60 days of the date your instructions to sell were
processed.
Distribution (12b-1) Fees
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of the Fund's shares. 12b-1 fees are paid from Fund assets on an ongoing basis,
and will increase the cost of your investment. The 12b-1 fees vary by share
class as follows:
. Class A shares of the Fund pay a 12b-1 fee of up to .50% of the average
daily net assets of the Fund.
. Class B and Class C shares pay a 12b-1 fee of up to .75% of the average
daily net assets of the Fund. This will cause expenses for Class B and
Class C shares to be higher and dividends to be lower than for Class A
shares.
. The higher 12b-1 fee on Class B and Class C Shares, together with the CDSC,
help the Distributor sell Class B and Class C shares without an "up-front"
sales charge. In particular, these fees help to defray the Distributor's
costs of advancing brokerage commissions to investment representatives.
. Long-term shareholders of Class B and Class C may pay indirectly more than
the equivalent of the maximum permitted front-end sales charge due to the
recurring nature of 12b-1 distribution fees.
26
<PAGE>
Shareholder Information
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Distribution Arrangements/Sales Charges
Service Organizations
Various banks, trust companies, broker-dealers (other than the Distributor) and
other financial organizations ("Service Organizations") may provide certain
administrative services for its customers who invests in the Fund through
accounts maintained at that Service Organization. The Fund will pay the Service
Organization a fee at an annual rate of up to .35% for Class A shares and up to
.50% for Class B and Class C shares of the average daily net asset value of
shares for which the Service Organization from time to time performs these
services. The services provided include:
. receiving and processing shareholder orders
. performing the accounting for the customers' sub-accounts
. maintaining retirement plan accounts
. answering questions and handling correspondence for individual accounts
. acting as the sole shareholder of record for its customers' accounts
. issuing shareholder reports and transaction confirmations
. performing daily "sweep" functions
Investors who purchase, sell or exchange shares for the Fund through a customer
account maintained at a Service Organization may be charged extra for other
services which are not specified in the servicing agreement with the Fund but
are covered under separate fee schedules provided by the Service Organization
to their customers. Customers with accounts at Service Organizations should
consult their Service Organization for information concerning their sub-
accounts. The Adviser or Administrator also may pay Service Organizations for
rendering services to shareholders sub-accounts.
27
<PAGE>
Shareholder Information
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Exchanging Your Shares
Instructions For Exchanging Shares
You can exchange Exchanges may be made by sending a written request to
your shares that HSBC Family of Funds, PO Box 163850, Columbus OH 43216-
have been held for 3850, or by calling 1-800-634-2536. Please provide the
at least seven days following information:
in a Fund for shares
of the same class of
another HSBC Fund,
usually without
paying additional
sales charges (see
"Notes on
Exchanges"). No
transaction fees are
charged for
exchanges.
. Your name and telephone number
. The exact name on your account and account number
. Taxpayer identification number (usually your Social
Security number)
. Dollar value or number of shares to be exchanged
You must meet the . The name of the Fund from which the exchange is to
minimum investment be made
requirements for the . The name of the Fund into which the exchange is
Fund into which you being made.
are exchanging.
Exchanges from one
Fund to another are
taxable. You should
review the
prospectus of the
HSBC Fund before
making an exchange.
See "Selling your Shares" for important information
about telephone transactions.
The Fund reserves the right to modify or terminate the
exchange privilege upon 60 days written notice.
28
<PAGE>
Shareholder Information
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A
Exchanging Your Shares
Automatic Exchanges Notes On Exchanges
When exchanging from a Fund that has no sales charge or
You can use the a lower sales charge to a Fund with a higher sales
Fund's Automatic charge, you will pay the difference.
Exchange feature to
purchase shares of
the Funds at regular
intervals through
regular, automatic
redemptions from the
Money Market Fund.
To participate in
the Automatic
Exchange:
The registration and tax identification numbers of the
two accounts must be identical.
The Exchange Privilege (including automatic exchanges)
may be changed or eliminated at any time upon a 60-day
notice to shareholders.
Be sure to read the Prospectus carefully of any Fund
into which you wish to exchange shares.
. Complete the
appropriate
section of the
Account
Application.
. Keep a minimum of
$10,000 in the
Money Market Fund
and $1,000 in the
Fund whose shares
you are buying.
To change the
Automatic Exchange
instructions or to
discontinue the
feature, you must
send a written
request to HSBC
Family of Funds,
P.O. Box 163850,
Columbus, Ohio
43216-3850.
29
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Shareholder Information
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Dividends, Distributions and Taxes
Any income a Fund receives in the form of interest or dividends is paid out,
less expenses, to its shareholders as dividends. Income dividends on the Growth
and Income Fund are usually paid semi-annually. Dividends on all other Funds
are paid monthly. Capital gains for all Funds are distributed at least
annually.
An exchange of shares is considered a sale, and any related gains may be
subject to applicable taxes.
Dividends are taxable as ordinary income as are dividends paid by the New York
Tax-Free Bond Fund that are derived from taxable investments. Taxes on capital
gains by the Funds will vary with the length of time the Fund has held the
security--not how long you have invested in the Fund.
During normal market conditions, the New York Tax-Free Bond Fund expects that
substantially all of its dividends will be excluded from gross income for
federal income tax purposes. The Fund may invest in certain securities with
interest that may be a preference item for the purposes of the alternative
minimum tax or a factor in determining whether Social Security benefits are
taxable. In such event, a portion of the Fund's dividends would not be exempt
from federal income taxes.
Dividends are taxable in the year in which they are paid, even if they appear
on your account statement the following year. Dividends and distributions are
treated in the same manner for federal income tax purposes whether you receive
them in cash or in additional shares.
You will be notified in January each year about the federal tax status of
distributions made by the Fund. Depending on your residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
Foreign shareholders may be subject to special withholding requirements. There
is a penalty on certain pre-retirement distributions from retirement accounts.
Consult your tax adviser about the federal, state and local tax consequences in
your particular circumstances.
30
<PAGE>
For more information about the Fund, the following documents are available free
upon request:
Annual/Semi-annual Reports (Reports):
The Fund's annual and semi-annual reports to shareholders contain additional
information on the Fund's investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
You can get free copies of Reports and the SAI, prospectuses of other Funds in
the HSBC Family, or request other information and discuss your questions about
the Funds by contacting a broker or bank that sells the Funds. Or contact the
Funds at:
HSBC Family of Funds
3435 Stelzer Road, Columbus, Ohio 43219
Telephone: 1-800-634-2536
----------------------------
You can review and copy the Fund's reports and SAIs at the Public Reference
Room of the Securities and Exchange Commission. You can get text-only copies:
. For a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-0102 or by electronic request at
[email protected]. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 202-942-8090.
. Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-06057.
<PAGE>
HSBC MUTUAL FUNDS TRUST
Growth and Income Fund
International Equity Fund
Mid Cap Growth Fund
Fixed Income Fund
New York Tax-Free Bond Fund
3435 Stelzer Road
Columbus, Ohio 43219
Information: (800) 634-2536
STATEMENT OF ADDITIONAL INFORMATION
HSBC Mutual Funds Trust (the "Trust") is an open-end, diversified management
investment company organized in Massachusetts on November 1, 1989, with multiple
investment portfolios including the Growth and Income Fund, the International
Equity Fund (the "International Fund"), the Mid Cap Fund, the Fixed Income Fund,
and the New York Tax-Free Bond Fund (the "New York Fund") herein referred to
individually as a "Fund" and collectively as the "Funds".
Each Fund offers Class A, Class B and Class C shares. The International Fund
also offers Institutional Class shares. Class A shares are subject to a
front-end sales load. Class B shares and Class C shares are not subject to a
front-end sales load but may be subject to contingent deferred sales charge.
Class A, Class B, and Class C shares are all subject to shareholder servicing
and Rule 12b-1 fees. The Institutional Class shares are available to customers
of financial institutions or corporations on behalf of their customers or
employees, or on behalf of any trust, pension, profit sharing or benefit plan
for such customers or employees. The Institutional Class shares are not subject
to a sales load and do not impose any shareholder servicing or Rule 12b-1 fees.
See "Shares of Beneficial Interest" herein.
Shares of the Funds are primarily offered for sale by BISYS Funds Services,
the Distributor, as an investment vehicle for institutions, corporations,
fiduciaries and individuals. Certain banks, financial institutions and
corporations ("Participating Organizations") have agreed to act as shareholder
servicing agents for investors who maintain accounts at the Participating
Organizations and to perform certain services for the Funds.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Funds'
Prospectuses dated April 30, 2000. This Statement of Additional Information
("SAI") contains additional and more detailed information than that set forth in
the Funds' Prospectuses and should be read in conjunction with the Funds'
Prospectuses, additional copies of which may be obtained without charge from the
Trust. Information regarding the investment performance of each Fund is
contained in the respective Fund's Annual Report dated December 31, 1999 which
may be obtained, without charge, from the Trust.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS............ 3
INVESTMENT RESTRICTIONS..................................... 47
MANAGEMENT.................................................. 49
COMPENSATION TABLE.......................................... 50
SERVICE ORGANIZATIONS....................................... 56
CALCULATION OF YIELDS AND PERFORMANCE INFORMATION........... 58
DETERMINATION OF NET ASSET VALUE............................ 61
PORTFOLIO TRANSACTIONS...................................... 62
PORTFOLIO TURNOVER.......................................... 63
EXCHANGE PRIVILEGE.......................................... 64
PURCHASE OF SHARES.......................................... 64
REDEMPTIONS................................................. 66
INCOME TAXES................................................ 67
SHARES OF BENEFICIAL INTEREST............................... 72
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING AGENT......... 75
INDEPENDENT AUDITORS........................................ 76
COUNSEL..................................................... 76
FINANCIAL STATEMENTS........................................ 76
</TABLE>
2
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of the GROWTH AND INCOME FUND is to provide
investors with long-term growth of capital and current income. The Fund seeks to
achieve its objective by investing, under ordinary market conditions, primarily
in common stocks, preferred stocks and securities convertible into or with
rights to purchase common stocks ("equity securities"). As a matter of
fundamental policy, during normal market conditions, at least 65% of the value
of the Fund's total assets will be invested in equity securities. The balance of
the Fund's assets may be invested in various types of fixed income securities
and in money market instruments. Most of the Fund's investments will be
securities. The Adviser expects that the Fund's investments will consist of
companies which will be of various sizes and in various industries and may in
many cases be leaders in their fields. In addition, the Fund may, within certain
limitations as set forth below, lend portfolio securities, enter into repurchase
agreements, invest in when-issued and delayed delivery securities and write
covered call options. The Fund may use stock index futures, related options and
options on stock indices for the sole purpose of hedging the portfolio. The
Growth and Income Fund's investments in fixed income securities will primarily
consist of securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities, and investment grade debt obligations issued or
guaranteed by domestic corporations or commercial banks. From time to time, the
Fund may also invest up to 5% of its total assets in the debt obligations of
foreign issuers. The types of debt obligations in which the Growth and Income
Fund will invest include, among others, bonds, notes, debentures, commercial
paper, variable and floating rate demand and master demand notes, zero coupon
securities and asset-backed and mortgage-related securities.
The Fund intends to stay invested in the equity securities described above
to the extent practicable in light of its investment objective and long-term
investment perspective. Under ordinary market conditions, therefore, no more
than 35% of the Fund's total assets will be invested in fixed income securities
and money market instruments for purposes of meeting the Fund's investment
objective of current income. However, for temporary defensive purposes, e.g.,
during periods in which adverse market changes or other adverse economic
conditions warrant as determined by the Adviser, the Fund may invest up to 100%
of its total assets in money market instruments as described below.
The investment objective of the INTERNATIONAL FUND is to seek to provide
investors with long-term capital appreciation. The Fund seeks to achieve its
objective by investing, under ordinary market conditions, at least 65% of its
total assets in equity securities (including American, Global and European
Depositary Receipts) issued by companies based outside of the United States. The
balance of the Fund's assets will generally be invested in equity securities of
companies based in and debt securities of companies and governments issued in
the United States and outside the United States including bonds and money market
instruments. The Fund may, for temporary defensive purposes, invest up to 100%
of its assets in these instruments.
The investment objective of the Mid Cap Fund is to achieve a higher rate of
return from than that generated by the S&P 400. The Fund seeks to achieve its
objective by investing in common and preferred stock and convertible securities.
The Fund normally invests at least 65% of its total assets in equity securities
of mid-sized companies (those with market capitalizations falling within the
S&P 400 Index at the time of purchase). Investments are primarily in common
stocks, preferred stocks and convertible securities.
The balance of the Fund's assets may be invested in various types of fixed
income securities and in money market instruments. Most of the Fund's
investments will be securities listed on the New York or American Stock
Exchanges or on NASDAQ and may also consist of American Depository Receipts
("ADRs") and investment company securities. In addition, the Fund may, within
certain limitations as set forth below, lend portfolio securities, enter into
repurchase agreements, invest in when-issued and delayed delivery securities and
write covered call options. The Fund may use stock index futures, related
options and options on stock indices for the sole purpose of hedging the
portfolio. The Mid Cap Growth Fund's investments in fixed income securities will
primarily consist of securities issued or guaranteed by domestic corporations or
commercial banks. From time to time, the Fund may also invest up to 5% of its
total assets in the debt obligations of foreign issuers. The types of debt
obligations in which the Fund will invest include, among others, bonds, notes,
debentures, commercial paper, variable and floating rate demand and master
demand notes, zero coupon securities and asset-backed and mortgage related
securities.
The Fund intends to stay invested in the equity securities described above
to the extent practicable in light of its investment objective and long-term
investment perspective. Under ordinary market conditions, therefore, no more
than 35% of the Fund's total assets will be invested in fixed income securities
and money market instruments for purposes of meeting the Fund's investment
objective. However, for temporary defensive purposes, e.g., during periods in
which adverse market changes or other adverse economic conditions warrant as
determined by the Adviser, the Fund may invest up to 100% of its total assets in
money market instruments as described below.
The investment objective of the FIXED INCOME FUND is generation of high
current income consistent with appreciation of capital. The Fund seeks to
achieve its objective by investing, under ordinary market conditions, in a
variety of fixed-income securities. Under normal conditions, at least 65% of its
total assets will be invested in fixed income securities rated at least Baa by
Moody's Investors Services or BBB by Standard & Poor's Corporation or which is
comparably rated by another rating agency or, if unrated, is determined by the
Adviser to be of comparable quality. The balance of the Fund's investments may
be invested in variable and floating rate debt securities which meet the issuer
and quality standard described above as well as taxable municipal securities and
money market securities. The Fixed
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Income Fund will base its investment selection upon analysis of prevailing
market and economic conditions. Although the Fund has no present intention of
doing so, the Fund may utilize options on securities, interest rate futures
contracts and options thereon to reduce certain risks to its investments and to
attempt to enhance income, but not for speculation.
The investment objective of the NEW YORK FUND is to provide as high a level of
current income exempt from Federal, New York State and New York City income
taxes as is consistent with relative stability of capital. As a matter of
fundamental policy, the Fund will maintain 80% of net assets in tax-exempt
municipal obligations that are not subject to the Federal alternative minimum
tax. The Fund may elect to invest 20% of total assets in securities subject to
the Federal alternative minimum tax. Generally at least 65% of the Fund's total
assets will be invested in bonds of New York issuers. The balance of the Fund
may be invested in other New York obligations or other securities that are not
New York obligations and therefore subject to New York State and New York City
income taxes.
SHORT-TERM TRADING. Although the Funds will not make a practice of short- term
trading, purchases and sales of securities will be made whenever necessary or
desirable in the management's view to achieve the investment objective of the
Funds. Management does not expect that in pursuing each Fund's investment
objective unusual portfolio turnover will be required and intends to keep
turnover to a minimum consistent with such investment objective. The management
believes unsettled market economic conditions during certain periods require
greater portfolio turnover in pursuing the Funds' investment objectives than
would otherwise be the case. A higher incidence of portfolio turnover will
result in greater transaction costs to the Funds.
DEPOSITARY RECEIPTS. (Growth and Income Fund, International Fund and Mid Cap
Fund) The International Fund may invest in the securities of foreign issuers in
the form of American Depositary Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other depositary receipts. The
Growth and Income Fund may invest in ADRs only. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. EDRs, which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), are receipts issued in Europe typically by non-
United States banks and trust companies that evidence ownership of either
foreign or domestic securities. GDRs are issued globally and evidence a similar
ownership arrangements. Generally, ADRs in registered form are designed for use
in the United States securities markets and EDRs and CDRs in bearer form are
designed for use in Europe and GDRs are designed for trading in non-U.S.
securities markets. The International Equity Fund may invest in ADRS, EDRs, CDRs
and GDRs through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the underlying security and a
depositary, whereas a depositary may establish an unsponsored facility without
participation by the issuer of the deposited security. Holders of unsponsored
depositary receipts generally bear all the costs of such facilities and the
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to holders of such receipts in respect
of the deposited securities. The Growth and Income Fund intends to invest less
than 20% of the Fund's total net assets in ADRs.
There are certain risks associated with investments in unsponsored depositary
programs. Because the non-U.S. company does not actively participate in the
creation of the depositary program, the underlying agreement for service and
payment will be between the depositary and the shareholder. The company issuing
the stock underlying the depositary receipts pays nothing to establish the
unsponsored facility, as fees for depositary receipt issuance and cancellation
are paid by brokers. Investors directly bear the expenses associated with
certificate transfer, custody and dividend payment.
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In an unsponsored depositary program, there also may be several depositaries
with no defined legal obligations to the non-U.S. company. The duplicate
depositaries may lead to marketplace confusion because there would be no central
source of information to buyers, sellers and intermediaries. The efficiency of
centralization gained in a sponsored program can greatly reduce the delays in
delivery of dividends and annual reports.
In addition, with respect to all depositary receipts, there is always the risk
of loss due to currency fluctuations.
FOREIGN SECURITIES. (International Fund, Growth and Income Fund and Mid Cap
Fund) Investment in securities of foreign issuers may subject the Fund to risks
of foreign political, economic and legal conditions and developments that an
investor would not encounter investing in equity securities issued by U.S.
domestic companies. Such conditions or developments might include favorable or
unfavorable changes in currency exchange rates, exchange control regulations
(including currency blockage), expropriation of assets of companies in which the
Fund invests, nationalization of such companies, imposition of withholding taxes
on dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against a foreign issuer. Also, foreign securities may not
be as liquid as, and may be more volatile than, comparable domestic common
stocks. In addition, foreign securities markets are generally not as developed
or efficient as those in the United States. There is generally less government
supervision and regulation of foreign securities exchanges, brokers and
companies than in the United States. Furthermore, issuers of foreign securities
are subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The Fund, in connection with its
purchases and sales of foreign securities, other than securities denominated in
United States Dollars, is influenced by the returns on the currencies in which
the securities are denominated. Currency risk is the risk that changes in
foreign exchange rates will affect, favorably or unfavorably, the value of
foreign securities held by the Fund. In a period when the U.S. Dollar generally
rises against foreign currencies, the value of foreign stocks for a U.S.
investor will be diminished. By contrast, in a period when the U.S. Dollar
generally declines, the value of foreign securities will be enhanced. Further,
brokerage costs in purchasing and selling securities in foreign securities
markets generally are higher than such costs in comparable transactions in
domestic securities markets, and foreign custodial costs relating to the Fund's
portfolio securities are higher than domestic custodial costs.
Investment in emerging market countries presents risks in greater degree than,
and in addition to, those presented by investment in foreign issuers in general.
A number of emerging market countries restrict, to varying degrees, foreign
investment in stocks. Repatriation of investment income, capital, and the
proceeds of sales of foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
these currencies by the Fund. Inflation and rapid fluctuations in inflation
rates have had and may continue to have a negative effect on the economies and
securities markets of certain emerging market countries.
SECURITIES OF FOREIGN GOVERNMENTS AND SUPRANATIONAL ORGANIZATIONS.
(International Fund and Fixed Income Fund) The Funds may invest in U.S. dollar-
denominated debt securities issued by foreign governments, their political
subdivisions, governmental authorities, agencies and instrumentalities and
supranational organizations. The International Fund can also invest in such
obligations denominated in foreign currencies. A supranational organization is
an entity designated or supported by the national government of one or more
countries to promote economic reconstruction or development. Examples of
supranational organizations include, among others, the International Bank for
Reconstruction and Development (World Bank), the European Economic Community,
the European Coal and Steel Community, the European Investment Bank, the Inter-
American Development Bank, the Asian
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Development Bank, and the African Development Bank. The Funds may also invest in
"quasi-government securities" which are debt obligations issued by entities
owned by either a national, state or equivalent government or are obligations of
such a government jurisdiction which are not backed by its full faith and credit
and general taxingpowers.
Investing in foreign government and quasi-government securities involves
considerations and possible risks not typically associated with investing in
obligations issued by the U.S. Government. The values of foreign investments are
affected by changes in governmental administration or economic or monetary
policy (in the U.S. or other countries) or changed circumstances in dealings
between countries. In addition, investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and lack of uniform accounting and auditing
standards.
WRITING COVERED CALLS. (Growth and Income Fund, International Fund and Mid Cap
Fund) The Funds may seek to earn premiums by writing covered call options
against some of the securities in its portfolio provided the options are listed
on a national securities exchange. A call option is "covered" if a Fund owns the
underlying securities covered by the call. The purchaser of the call option
obtains the right to acquire these securities at a fixed price (which may be
less than, the same as, or greater than the current market price of such
securities) during a specified period of time. The Fund, as the writer of the
option, forgoes the opportunity to profit from an increase in the market price
of the underlying security above the exercise price except insofar as the
premium represents such a profit.
Each Fund retains the risk of loss should the price of the underlying security
decline below the purchase price of the underlying security minus the premium.
The aggregate value of the securities subject to options written by a Fund may
not exceed 25% of the value of the Fund's net assets.
To the extent permitted below, the Funds may engage in transactions for the
purchase and sale of stock index options, stock index futures contracts and
options on stock index futures.
OPTIONS ON SECURITIES. (International Fund and Fixed Income Fund) Each Fund
may write (sell) covered put and call options and purchase put and call options
with a value of up to 25% of its total assets. The Funds will engage in options
trading principally for hedging purposes. The Funds may write call options on a
covered basis only, and will not engage in option
writing strategies for speculative purposes.
Each Fund may purchase call options, but only to effect a "closing
transaction"--i.e., to offset an obligation pursuant to a previously written
call option to prevent an underlying security from being called, or to permit
the sale of the underlying security or the writing of a new option on the
security prior to the outstanding option's expiration. Each Fund may also
purchase securities with put options, sometimes referred to as stand-by
commitments, which are otherwise eligible for investment in amounts not
exceeding 10% of its total assets, when a Fund anticipates a decline in the
market value of securities in the Fund's portfolio. The Fund will incur costs,
in the form of premiums, on options it purchases and may incur transaction costs
on options that it exercises. A Fund will ordinarily realize a gain from a put
option it has purchased if the value of the securities subject to the option
decreases sufficiently below the exercise price to cover both the premium and
the transaction costs.
STOCK INDEX OPTIONS. (Growth and Income Fund, International Fund and Mid Cap
Fund) The Funds may purchase and write put and call options on stock indexes
listed on national securities exchanges for the purpose of hedging their
portfolio. A stock index fluctuates with changes in the market values of the
stocks included in the index. Some stock index options are based on a broad
market index such as the New York Stock Exchange Composite Index, or a narrower
market index such as the Standard & Poor's 100. Indexes are
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also based on an industry or market segment such as the American Stock Exchange
Oil & Gas Index or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on stock, except that (a) the
expiration cycles of stock index options are monthly, while those of stock
options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt
of this cash amount will depend upon the difference between the closing level of
the stock index upon which the option is based and the exercise price of the
option. The amount of cash received will be equal to such difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. The writer may
offset its position in stock index options prior to expiration by entering into
a closing transaction on an exchange or it may let the option expire
unexercised.
INVESTMENT IN BOND OPTIONS. (Fixed Income Fund) The Fund may purchase put and
call options and write covered put and call options on securities in which the
Fund may invest directly and that are traded on registered domestic securities
exchanges or that result from separate, privately negotiated transactions with
primary U.S. Government securities dealers recognized by the Board of Governors
of the Federal Reserve System (i.e., over-the-counter (OTC) options). The writer
of a call option, who receives a premium, has the obligation, upon exercise, to
deliver the underlying security against payment of the exercise price during the
option period. The writer of a put, who receives a premium, has the obligation
to buy the underlying security, upon exercise, at the exercise price during the
option period.
The Fund may write put and call options on bonds only if they are covered, and
such options must remain covered as long as the Fund is obligated as a writer. A
call option is covered if a Fund owns the underlying security covered by the
call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration if the
underlying security is held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio. A put option
is covered if a Fund maintains cash, or other liquid assets with a value equal
to the exercise price in a segregated account with its custodian.
The principal reason for writing put and call options is to attempt to
realize, through the receipt of premiums, a greater current return than would be
realized on the underlying securities alone. In return for the premium received
for a call option, the Fund foregoes the opportunity for profit from a price
increase in the underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the price of the
security decline. In return for the premium received for a put option, the Fund
assumes the risk that the price of the underlying security will decline below
the exercise price, in which case the put would be exercised and the Fund would
suffer a loss. The Fund may purchase put options in an effort to protect the
value of a security it owns against a possible decline in market value.
STOCK INDEX FUTURES CONTRACTS. (Growth and Income Fund, International and Fund
Mid Cap Fund Fund) The Funds may enter into stock index futures contracts in
order to protect the value of their common stock investments. A stock index
futures contract is an agreement in which one party agrees to deliver to the
other an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. As the aggregate
market value of the stocks in the index changes, the value of the index also
will change. In the event that the index level rises above the level at which
the stock index futures contract was sold, the seller of the stock index futures
contract will realize a loss determined by
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the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the stock
index futures contract was sold, the seller will recognize a gain determined by
the difference between the two index levels at the expiration of the stock index
futures contract, and the purchaser will realize a loss in that amount. Stock
index futures contracts expire on a fixed date, currently one to seven months
from the date of the contract, and are settled upon expiration of the contract.
The Funds will sell stock index futures only if the amount resulting from the
multiplication of the then current level of the indices upon which such futures
contracts are based, and the number of futures contracts which would be
outstanding, do not exceed one-third of the value of the Fund's net assets.
When a futures contract is executed, each party deposits with a broker or in a
segregated custodial account up to 5% of the contract amount, called the
"initial margin," and during the term of the contract, the amount of the deposit
is adjusted based on the current value of the futures contract by payments of
variation margin to or from the broker or segregated account.
Each Fund intends to utilize stock index futures contracts only for the
purpose of attempting to protect the value of its common stock portfolio in the
event of a decline in stock prices and, therefore, usually will be the seller of
stock index futures contracts. This risk management strategy is an alternative
to selling securities in a portfolio and investing in money market instruments.
Also, stock index futures contracts may be purchased to protect the Fund against
an increase in prices of stocks which the Fund intends to purchase. If a Fund is
unable to invest its cash (or cash equivalents) in stock in an orderly fashion,
the Fund could purchase a stock index futures contract which may be used to
offset any increase in the price of the stock. However, it is possible that the
market may decline instead, resulting in a loss on the stock index futures
contract. If the Fund then concludes not to invest in stock at that time, or if
the price of the securities to be purchased remains constant or increases, the
Fund will realize a loss on the stock index futures contract that is not offset
by a reduction in the price of securities purchases. The Funds also may buy or
sell stock index futures contracts to close out existing futures positions.
OPTIONS ON STOCK INDEX FUTURES. (Growth and Income Fund, International Fund
and Mid Cap Fund Fund) The Funds may purchase and write call and put options on
stock index futures contracts which are traded on a United States or foreign
exchange or board of trade. An option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the option period.
Upon exercise of the option, the writer of the option is obligated to convey the
appropriate futures position to the holder of the option. If an option is
exercised on the last trading day before the expiration date of the option, a
cash settlement will be made in an amount equal to the difference between the
closing price of the futures contract and the exercise price of the option.
The Funds may use options on stock index futures contracts solely for bona
fide hedging or other appropriate risk management purposes. If a Fund purchases
a call (put) option on a futures contract, it benefits from any increase
(decrease) in the value of the futures contract, but is subject to the risk of
decrease (increase) in value of the futures contract. The benefits received are
reduced by the amount of the premium and transaction costs paid by the Fund for
the option. If market conditions do not favor the exercise of the option, the
Fund's loss is limited to the amount of such premium and transaction costs paid
by the Fund for the option.
If a Fund writes a call (put) option on a stock index futures contract, the
Fund receives a premium but assumes the risk of a rise (decline) in value in the
underlying futures contract. If the option is not exercised, the Fund gains the
amount of the premium, which may partially offset unfavorable changes due to
interest rate or currency exchange rate fluctuations in the value of the
securities held or to be acquired for the Fund's portfolio. If the option is
exercised, the Fund will incur a loss, which will be reduced by the amount of
the premium it receives. However, depending on the degree of correlation between
changes in
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the value of its portfolio securities (or the currency in which they are
denominated) and changes in the value of futures positions, the Fund's losses
from writing options on futures may be partially offset by favorable changes in
the value of portfolio securities or in the cost of securities to be acquired.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Funds'
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market. The Funds will sell options
on futures and on stock indices only to close out existing hedge positions.
Writing of options involves the risk that there will be no market in which to
effect a closing transaction. An exchange-traded option may be closed out only
on an exchange that provides a secondary market for an option of the same
series. Over-the-counter ("OTC") options are not generally terminable at the
option of the writer and may be closed out only by negotiation with the holder.
There is also no assurance that a liquid secondary market on an exchange will
exist. In addition, because OTC options are issued in privately negotiated
transactions exempt from registration under the Securities Act of 1933, there is
no assurance that a Fund will succeed in negotiating a closing out of a
particular OTC option at any particular time. If the Fund, as covered call
option writer, is unable to effect a closing purchase transaction in the
secondary market or otherwise, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
The staff of the United States Securities and Exchange Commission (the "SEC")
has taken the position that purchased options not traded on registered domestic
securities exchanges and the assets used as cover for written options not traded
on such exchanges are generally illiquid securities. However, the staff has also
opined that, to the extent a mutual fund sells an OTC option to a primary dealer
that it considers creditworthy and contracts with such primary dealer to
establish a formula price at which the fund would have the absolute right to
repurchase the option, the fund would only be required to treat as illiquid the
portion of the assets used to cover such option equal to the formula price minus
the amount by which the option is in-the-money. Pending resolution of the issue,
the Fund will treat such options and, except to the extent permitted through the
procedure described in the preceding sentence, assets as subject to the Fund's
limitation on investments in securities that are not readily marketable.
Each Fund's successful use of stock index futures contracts, options on such
contracts and options on indices depends upon the Adviser's ability to predict
the direction of the market and is subject to various additional risks. The
correlation between movements in the price of the futures contract and the price
of the securities being hedged is imperfect and the risk from imperfect
correlation increases in the case of stock index futures as the composition of a
Fund's portfolio diverges from the composition of the relevant index. Such
imperfect correlation may prevent a Fund from achieving the intended hedge or
may expose a Fund to risk of loss. In addition, if a Fund purchases futures to
hedge against market advances before it can invest in common stock in an
advantageous manner and the market declines, a Fund might create a loss on the
futures contract. Particularly in the case of options on stock index futures
and on stock indices, a Fund's ability to establish and maintain positions will
depend on market liquidity. The successful utilization of hedging and risk
management transactions requires skills different form those needed in the
selection of the Fund's portfolio securities. The Funds believe that the
Adviser possesses the skills necessary for the successful utilization of hedging
and risk management transactions.
Positions in options, futures and options on futures may be closed out only on
an exchange which provides a secondary market for such purposes. There can be
no assurance that a liquid secondary market will exist for any particular
option, futures contract or related option at any specific time. Thus, it may
not be possible to close such an option or futures position which could have an
adverse impact on a
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Fund's ability to effectively hedge its securities. A Fund will enter into an
option or futures position only if there appears to be a liquid secondary market
for such options or futures.
Pursuant to undertakings with the Commodity Futures Trading Commission
("CFTC"), (i) each Fund has agreed to restrict the use of futures and related
options only for the purpose of hedging, as such term is defined in the CFTC's
rules and regulations; (ii) the Funds will not enter into futures and related
transactions if, immediately thereafter, the sum of the margin deposits on a
Fund's existing futures and related options positions and the premiums paid for
related options would exceed 5% of the market value of such Fund's total assets
after taking into account unrealized profits and unrealized losses on any such
contract; (iii) the Funds will not market, and are not marketing, themselves as
commodity pools or otherwise as vehicles for trading in commodity futures and
related options; and (iv) the Funds will segregate assets to cover the futures
and options.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON. (International Fund and
Fixed Income Fund) The Funds may use interest rate futures contracts ("futures
contracts") principally as a hedge against the effects of interest rate changes.
A futures contract is an agreement to purchase or sell a specified amount of
designated debt securities for a set price at a specified future time. At the
time it enters into a futures transaction, the Fund is required to make a
performance deposit (initial margin) of cash or liquid securities with its
custodian in a segregated account in the name of the futures broker. Subsequent
payments of "variation margin" are then made on a daily basis, depending on the
value of the futures which is continually "marked to market."
The Fund is permitted to engage in bona fide hedging transactions (as defined
in the rules and regulations of the Commodity Futures Trading Commission)
without any quantitative limitations. Futures and related option transactions
which are not for bona fide hedging purposes may be used provided the total
amount of the initial margin and any option premiums attributable to such
positions does not exceed 5% of the Fund's liquidating value after taking into
account unrealized profits and unrealized losses, and excluding any in-the-
money option premiums paid. The Fund will not market, and is not marketing,
itself as a commodity pool or otherwise as a vehicle for trading in futures and
related options. The Fund will segregate assets to cover the futures and
options. If the market moves favorably after the Fund enters into an interest
rate futures contract as a hedge against anticipated adverse market movements,
the benefits from such favorable market movements on the value of the securities
so hedged will be offset in whole or in part, by a loss on the futures contract.
The Fund may engage in futures contract sales to maintain the income advantage
from continued holding of a long-term security while endeavoring to avoid part
or all of the loss in market value that would otherwise accompany a decline in
long-term security prices. If, however, securities prices rise, the Fund would
realize a loss in closing out its futures contract sales that would offset any
increases in prices of the long-term securities it holds.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS. (International Equity Fund and
Fixed Income Fund) Each Fund may purchase put and call options on interest rate
futures contracts. Each Fund may also write (sell) put and call options on such
futures contracts. As with futures contracts, the Funds will purchase or sell
options on interest rate futures contracts solely for bona fide hedging purposes
and not as a means of speculative trading. An option on a futures contract
gives the purchaser the right, but not the obligation, in return for the premium
paid, to assume (in the case of a call) or sell (in the case of a put) a
position in a specified underlying futures contract (which position may be a
long or short position) a specified exercise price at any time during the option
exercise period. Sellers of options on futures contracts, like buyers and
sellers of futures contracts, make an initial performance deposit and are
subject to calls for variation margin.
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FORWARD FOREIGN EXCHANGE CONTRACTS. (International Fund) The Fund may conduct
its foreign currency exchange transactions on a spot (i.e. cash) basis at the
spot rate prevailing in the foreign currency exchange market or by entering into
forward foreign exchange contracts. A forward foreign exchange contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and its customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
At the maturity of a forward contract, the Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
The Fund may enter into forward foreign exchange contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a Fund anticipates
the receipt in a foreign currency of dividend or interest payments on such a
security which it holds, the Fund may desire to "lock in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, a Fund will attempt to protect
itself against an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Fund's
foreign assets.
The Fund will not enter into forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the Fund
to deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. The Fund's
custodian will place cash or readily marketable securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign exchange contracts requiring
the Fund to purchase foreign currencies or forward contracts entered into for
non-hedging purposes. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
The Fund generally will not enter into forward contracts with a term of
greater than one year. Using forward contracts to protect the value of the
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which the Fund can achieve at some future point
in time.
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While the Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks and,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between the Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving a complete hedge or
may expose the Fund to risk of foreign exchange loss.
OPTIONS ON CURRENCIES. (International Fund) The Fund will purchase and write
put and call options on foreign currencies (traded on U.S. and foreign exchanges
or over-the-counter markets) to manage the Fund's exposure to changes in dollar
exchange rates. Call options on foreign currency written by the Fund will be
"covered," which means that the Fund will own an equal amount of the underlying
foreign currency. With respect to put options on foreign currency written by the
Fund, the Fund will establish a segregated account with its custodian bank
consisting of cash or liquid securities in an amount equal to the amount the
Fund would be required to pay upon exercise of the put.
RISKS INVOLVING FUTURES TRANSACTIONS. Transactions by the Funds in futures
contracts and options thereon involve certain risks. One risk in employing
futures contracts and options thereon to protect against cash market price
volatility is the possibility that futures prices will correlate imperfectly
with the behavior of the prices of the securities in a Fund's portfolio (the
portfolio securities will not be identical to the securities underlying the
futures contracts). In addition, commodity exchanges generally limit the amount
of fluctuation permitted in futures contract and option prices during a single
trading day, and the existence of such limits may prevent the prompt liquidation
of futures and option positions in certain cases. Inability to liquidate
positions in a timely manner could result in the Fund incurring larger losses
than would otherwise be the case.
OPTION PREMIUMS. (Growth and Income Fund, International Fund and Mid Cap
Fund) In order to comply with certain state securities regulations, the Funds
have agreed to limit maximum premiums paid on put and call options on other than
futures contracts to less than 2% of each Fund's net assets at any one
time.
U.S. GOVERNMENT SECURITIES. (Growth and Income Fund, Fixed Income Fund and Mid
Cap Fund) The Funds may invest in all types of securities issued or guaranteed
as to principal and interest by the U.S. Government, its agencies, authorities
or instrumentalities, including U.S. Treasury obligations with varying interest
rates, maturities and dates of issuance, such as U.S. Treasury bills (maturities
of one year or less) U.S. Treasury notes (generally maturities of one to ten
years) and U.S. Treasury bonds (generally maturities of greater than ten years)
and obligations issued or guaranteed by U.S. Government agencies or which are
supported by the full faith and credit pledge of the U.S. Government. In the
case of U.S. Government obligations which are not backed by the full faith and
credit pledge of the United States, the Funds must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may not
be able to assert a claim against the United States in the event the agency or
instrumentality is unable to meet its commitments. Such securities may also
include securities for which the payment of principal and interest is backed by
an irrevocable letter of credit issued by the U.S. Government, its agencies,
authorities or instrumentalities and participations in loans made to foreign
governments or their agencies that are substantially guaranteed by the U.S.
Government (such as Government Trust Certificates). See "Mortgage-Related
Securities" and "Asset-Backed Securities" below.
MORTGAGE-RELATED SECURITIES. (Growth and Income Fund, Fixed Income Fund and
Mid Cap Fund) Each Fund may, consistent with its investment objective and
policies, invest in mortgage-related securities.
Mortgage-related securities, for purposes of the Funds' Prospectus and this
SAI, represent pools of mortgage loans assembled for sale to investors by
various governmental agencies such as the Government
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National Mortgage Association and government-related organizations such as the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation, as well as by nongovernmental issuers such as commercial banks,
savings and loan institutions, mortgage bankers, and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. If a Fund purchases a mortgage-related
security at a premium, that portion may be lost if there is a decline in the
market value of the security whether resulting from changes in interest rates or
prepayments in the underlying mortgage collateral. As with other interest-
bearing securities, the prices of such securities are inversely affected by
changes in interest rates. However, though the value of a mortgage-related
security may decline when interest rates rise, the converse is not necessarily
true since in periods of declining interest rates the mortgages underlying the
securities are prone to prepayment. For this and other reasons, a mortgage-
related security's stated maturity may be shortened by unscheduled prepayments
on the underlying mortgages and, therefore, it is not possible to predict
accurately the security's return to a Fund. Similarly, because the average life
of mortgage related securities may lengthen with increases in interest rates,
the portfolio weighted average life of the mortgage-related securities in which
the Fund invests may at times lengthen due to this effect. Under these
circumstances, the Adviser may, but is not required to, sell securities in order
to maintain an appropriate portfolio average life.
Regular payments received in respect of mortgage-related securities include
both interest and principal. No assurance can be given as to the yield and total
return a Fund will receive when these amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities,
and among the securities that they issue. Mortgage-related securities created by
the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes"), which are guaranteed as
to the timely payment of principal and interest and such guarantee is backed by
the full faith and credit of the United States. GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA certificates also are supported by the authority of GNMA to borrow funds
from the U.S. Government to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States. The FNMA is a government-
sponsored organization owned entirely by private stockholders. Fannie Maes are
guaranteed as to timely payment of the principal and interest by FNMA. Mortgage-
related securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
currently guarantees timely payment of interest and either timely payment of
principal or eventual payment of principal depending upon the date of issue.
When the FHLMC does not guarantee timely payment of principal, FHLMC may remit
the amount due based on its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
In addition to GNMA, FNMA or FHLMC certificates, through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Funds also may invest in mortgage pass-through
securities, where all interest payments go to one class of holders ("Interest
Only Securities" or "IOs") and all principal payments go to a second class of
holders ("Principal
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Only Securities" or "POs"). These securities are commonly referred to as
mortgage-backed security strips or MBS strips. The yields to maturity on IOs and
POs are particularly sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and principal payments
may have a material effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the return on POs could be adversely affected. Each Fund will treat
IOs and POs as illiquid securities except for IOs and POs issued by U.S.
Government agencies and instrumentalities backed by fixed-rate mortgages, whose
liquidity is monitored by the Adviser subject to the supervision of the Board of
Trustees.
The Funds may also invest in certain Collateralized Mortgage Obligations
("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs") which are
hybrid instruments with characteristics of both mortgage-backed bonds and
mortgage pass-through securities. Interest and prepaid principal on a CMO or
REMIC are paid monthly or semi-annually. CMOs and REMICs may be collateralized
by whole mortgage loans but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs and
REMICs are structured into multiple classes, with each class bearing a different
expected maturity. Payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding the
longer maturity classes generally receive principal only after the earlier
classes have been retired. To the extent a particular CMO or REMIC is issued by
an investment company, the Fund's ability to invest in such CMOs or REMICs will
be limited. The Funds will not invest in the residual interests of REMICs.
The Adviser expects that new types of mortgage-related securities may be
developed and offered to investors. The Adviser will, consistent with each
Funds' investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
The yield characteristics of mortgage-related securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Fund purchases a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
Fund purchases these securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity.
Like other bond investments, the value of mortgage-backed securities will tend
to rise when interest rates fall and to fall when interest rates rise. Their
value may also be affected by changes in the market's perception of the
creditworthiness of the entity issuing or guaranteeing them or by changes in
government regulations and tax policies. The magnitude of these fluctuations
generally will be greater when the average maturity of a Fund's portfolio
securities is longer.
Assumptions generally accepted by the industry concerning the probability of
early payment may be used in the calculation of maturities for debt securities
that contain put or call provisions, sometimes resulting in a calculated
maturity different than the stated maturity of the security.
ASSET-BACKED SECURITIES. (Growth and Income Fund, Fixed Income Fund and Mid
Cap Fund) Through the use of trusts and special purpose subsidiaries, various
types of assets, primarily home equity loans and automobile and credit card
receivables, are being securitized in pass-through structures similar to the
mortgage pass-through structures described above or in a pay-through structure
similar to the collateralized mortgage structure. Consistent with the Fund's
investment objectives, policies and quality
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standards, each Fund may invest in these and other types of asset-backed
securities which may be developed in the future.
Asset-backed securities involve certain risks that are not posed by mortgage-
related securities, resulting mainly from the fact that asset-backed securities
do not usually contain the complete benefit of a security interest in the
related collateral. For example, credit card receivables generally are unsecured
and the debtors are entitled to the protection of a number of state and Federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities. The risks associated with
asset-backed securities are often reduced by the addition of credit enhancements
as a letter of credit from a bank, excess collateral or a third-party guarantee.
ZERO COUPON SECURITIES. (Growth and Income Fund, Fixed Income Fund and Mid Cap
Fund) The Funds may invest in zero coupon securities. A zero coupon security
pays no interest to its holder during its life and is sold at a discount to its
face value at maturity. The market prices of zero coupon securities generally
are more volatile than the market prices of securities that pay interest
periodically and are more sensitive to changes in interest rates than non-zero
coupon securities having similar maturities and credit qualities.
The Funds may invest in separately traded principal and interest components of
securities guaranteed or issued by the U.S. Treasury if such components are
traded independently. Under the STRIPS (Separate Trading of Registered Interest
and Principal of Securities) program, the principal and interest components are
individually numbered and separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts
independently.
Current Federal income tax law requires that a holder of a zero coupon
security report as income each year the portion of the original issue discount
on such security that accrues that year, even though the holder receives no cash
payments of interest during the year.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES. (Growth and Income
Fund, Fixed Income Fund and Mid Cap Fund) Each Fund may, from time to time, buy
variable or floating rate demand notes issued by corporations, bank holding
companies and financial institutions and similar taxable and tax-exempt
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on specified notice. The obligation of the
issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The purchase price
is ordinarily par plus accrued and unpaid interest. Generally, the remarketing
agent will adjust the interest rate every seven days (or at other specified
intervals) in order to maintain the interest rate at the prevailing rate for
securities with a seven-day or other designated maturity. Each Fund's investment
in demand instruments which provide that the Fund will not receive the principal
note amount within seven days' notice, in combination with the Fund's other
investments which are not readily marketable, will be limited to an aggregate
total of 15% of the Fund's net assets.
Each Fund may also buy variable rate master demand notes. The terms of the
obligations permit the Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between a Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. Each Fund has the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or to
decrease the amount and the borrower may repay up to the full amount of the note
without penalty. The notes may or may not be backed by bank letters of credit.
Because the notes are direct lending arrangements between a Fund and the
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they
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are redeemable (and, thus, immediately repayable by the borrower) at principal
amount, plus accrued interest, at any time. In connection with any such purchase
and on an ongoing basis, the Adviser will consider the earning power, cash flow
and other liquidity ratios of the issuer, and its ability to pay principal and
interest on demand, including a situation in which all holders of such notes
make demand simultaneously. While master demand notes, as such, are not
typically rated by credit rating agencies, each Fund may, under its minimum
rating standards, invest in them only if, at the time of an investment, the
issuer meets the criteria set forth in this Prospectus for investment in money
market instruments.
LOANS OF PORTFOLIO SECURITIES. (All Funds) Each Fund may, subject to the
restrictions set forth under "Investment Restrictions," make loans of portfolio
securities to brokers, dealers and financial institutions if cash or cash
equivalent collateral, including letters of credit, equal to at least 102% of
the current market value of the securities loaned (including accrued dividends
and interest thereon) plus the interest payable with respect to the loan is
maintained by the borrower with the lending Fund in a segregated account. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. In determining whether to lend a security to
a particular broker, dealer or financial institution, the Adviser will consider
all relevant facts and circumstances, including the creditworthiness of the
broker, dealer or financial institution and whether the income to be earned from
the loan justifies the attendant risks. The Funds will not enter into any
portfolio security lending arrangement having a duration of longer than one
year. Any securities which a Fund may receive as collateral will not become part
of the Fund's portfolio at the time of the loan and, in the event of a default
by the borrower, the Fund will, if permitted by law, dispose of such collateral
except for such part thereof which is a security in which the Fund is permitted
to invest. During the time securities are on loan, the borrower will pay a Fund
an amount equal to 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 which has delivered cash equivalent collateral.
The Funds will not loan securities having an aggregate value which exceeds 33
1/3% of the current value of the Fund's total assets. Loans of securities will
be subject to termination at the lender's or the borrower's option. The Fund may
pay reasonable administrative and custodial fees in connection with a securities
loan and may pay a negotiated portion of the interest or fee earned with respect
to the collateral to the borrower or the placing broker. Borrowers and placing
brokers may not be affiliated, directly or indirectly, with the Fund, its
investment adviser or subadviser.
REPURCHASE AGREEMENTS. (All Funds) Each Fund may invest in securities pursuant
to repurchase agreements, whereby the seller agrees to repurchase such
securities at the Fund's cost plus interest within a specified time (generally
one day). While repurchase agreements involve certain risks not associated with
direct investments in the underlying securities, the Funds will follow
procedures designed to minimize such risks. These procedures include effecting
repurchase transactions only with large, well-capitalized banks and registered
broker-dealers having creditworthiness determined by the Adviser to be
substantially equivalent to that of issuers of debt securities rated investment
grade. In addition, the Funds' repurchase agreements will provide that the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement, and that the Fund's custodian will take possession of such
collateral. In the event of a default or bankruptcy by the seller, the Fund will
seek to liquidate such collateral. The Adviser will continually monitor the
value of the underlying securities to ensure that their value always equals or
exceeds the repurchase price plus accrued interest. However, the exercise of the
Funds' right to liquidate such collateral could involve certain costs or delays
and, to the extent that proceeds from any sale upon a default of the obligation
to repurchase were less than the repurchase price, the Fund could suffer a loss.
Repurchase agreements are considered to be loans by an investment company under
the 1940 Act. It is the current policy of the Funds (except the International
Fund) not to enter into repurchase agreements
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exceeding in the aggregate 10% (15% in the case of the Fixed Income Fund) of the
market value of the Fund's total assets.
Repurchase agreements may involve certain risks. If the seller in the
transaction becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code, recent amendments to the Bankruptcy Code permit the Funds
to exercise a contractual right to liquidate the underlying securities. However,
if the seller is a stockbroker or other entity not afforded protection under the
Bankruptcy Code, an agency having jurisdiction over the insolvent entity may
determine that a Fund does not have the immediate right to liquidate the
underlying securities. If the seller defaults, a Fund might incur a loss if the
value of the underlying securities declines. A Fund may also incur disposition
costs in connection with the liquidation of the securities. While the Funds'
management acknowledges these risks, it is expected that they can be controlled
through selection criteria established by the Board of Trustees and monitoring
procedures.
ILLIQUID SECURITIES. (All Funds) A Fund will not invest in illiquid securities
if immediately after such investment more than 15% of such Fund's net assets
(taken at market value) would be invested in such securities. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended ("Securities Act"), securities that are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities that have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Each Fund may also invest in restricted securities issued under Section 4(2)
of the Securities Act, which exempts from registration "transactions by an
issuer not involving any public offering." Section 4(2) instruments are
restricted in the sense that they can only be resold through the issuing dealer
and only to institutional investors; they cannot be resold to the general public
without registration. Restricted securities issued under Section 4(2) of the
Securities Act will be treated as illiquid and subject to the Fund's investment
restriction on illiquid securities.
The Commission has adopted Rule 144A, which allows a broader institutional
trading market for securities otherwise subject to restrictions on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act applicable to resales of certain securities
to qualified institutional buyers. The Adviser anticipates that the market for
certain restricted securities such as institutional commercial paper will expand
further as a result of this regulation and the development of automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of
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Securities Dealers, Inc. (the "NASD"). Consequently, it is the intent of the
Funds to invest, pursuant to procedures established by the Board of Trustees and
subject to applicable investment restrictions, in securities eligible for resale
under Rule 144A which are determined to be liquid based upon the trading markets
for the securities.
The Adviser will monitor the liquidity of restricted securities in each Fund's
portfolio under the supervision of the Trustees. In reaching liquidity
decisions, the Adviser will consider, among other things, the following factors:
(1) the frequency of trades and quotes for the security over the course of six
months or as determined in the discretion of the Adviser; (2) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers over the course of six months or as determined in the
discretion of the Adviser; (3) dealer undertakings to make a market in the
security; (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer); and (5) other factors, if
any, which the Adviser deems relevant. The Adviser will also monitor the
purchase of Rule 144A securities to assure that the total of all Rule 144A
securities held by a Fund does not exceed 15% of the respective Fund's average
daily net assets. Rule 144A securities which are determined to be liquid based
upon their trading markets will not, however, be required to be included among
the securities considered to be illiquid for purposes of Investment Restriction
No. 9.
INVESTMENT COMPANY SECURITIES. (All Funds) Each Fund may invest up to 10% of
its total assets in securities issued by other investment companies. Such
securities will be acquired by the Fund within the limits prescribed by the
Investment Company Act of 1940, as amended (the "1940 Act"), which include a
prohibition against a Fund investing more than 10% of the value of its total
assets in such securities. Investors should recognize that the purchase of
securities of other investment companies results in duplication of expenses such
that investors indirectly bear a proportionate share of the expenses of such
companies including operating costs, and investment advisory and administrative
services fees. Each Fund may not invest more than 5% of its total assets in the
securities of any one investment company.
LONG-TERM AND SHORT-TERM CORPORATE DEBT OBLIGATIONS. (International Fund,
Growth and Income Fund, Fixed Income Fund and Mid Cap Fund) The Funds may invest
in U.S. dollar-denominated debt obligations issued or guaranteed by U.S.
corporations or U.S. commercial banks, U.S. dollar-denominated obligations of
foreign issuers and debt obligations of foreign issuers denominated in foreign
currencies. Such debt obligations include, among others, bonds, notes,
debentures, commercial paper and variable rate demand notes. The bank
obligations in which each Fund may invest are certificates of deposit, bankers'
acceptances, and fixed time deposits. The Adviser, in choosing corporate debt
securities on behalf of the Fund will evaluate each issuer based on (i) general
economic and financial conditions; (ii) the specific issuer's (a) business and
management, (b) cash flow, (c) earnings coverage of interest and dividends, (d)
ability to operate under adverse economic conditions, (e) fair market value of
assets, and (f) in the case of foreign issuers, unique political, economic or
social conditions applicable to such issuer's country; and, (iii) other
considerations the Adviser deems appropriate. Except for temporary defensive
purposes, the International Fund is limited to 20% of its total assets in these
types of securities and the Growth and Income Fund is limited to 5% of its total
assets.
The Funds will not purchase corporate debt securities rated below Baa by
Moody's Investors Service ("Moody's") or BBB by Standard & Poor's Corporation
("S&P") or to the extent certain U.S. or foreign debt obligations are unrated or
rated by other rating agencies, result in comparable quality. While "Baa"/"BBB"
and comparable unrated securities may produce a higher return than higher rated
securities, they are subject to a greater degree of market fluctuation and
credit risk than the higher quality securities in which the Fund may invest and
may be regarded as having speculative characteristics as well.
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After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Adviser will
consider such event in its determination of whether the Fund should continue to
hold the security. A security which has had its rating downgraded or revoked may
be subject to greater risk of principal and income, and often involve greater
volatility of price, than securities in the higher rating categories. Such
securities are also subject to greater credit risks (including, without
limitation, the possibility of default by or bankruptcy of the issuers of such
securities) than securities in higher rating categories. To the extent the
ratings given by a rating agency may change as a result of changes in such
organization or its rating systems, the Fixed Income Fund will attempt to
conform its ratings systems to such changes as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
SAI.
Investment in obligations of foreign issuers may present a greater degree of
risk than investment in domestic securities because of less publicly available
financial and other information, less securities regulation, potential
imposition of foreign withholding and other taxes, war, expropriation or other
adverse governmental actions.
CONVERTIBLE SECURITIES. (Growth and Income Fund, International Fund and Mid
Cap Fund) The Fund may invest in convertible securities which have
characteristics similar to both fixed income and equity securities. Convertible
securities pay a stated rate of interest and generally are convertible into the
issuer's common stock at a stated conversion price prior to call or redemption.
Because of the conversion feature, the market value of convertible securities
tends to move together with the market value of the underlying stock. As a
result, the Fund's selection of convertible securities is based, to a great
extent, on the potential for capital appreciation that may exist in the
underlying stock. The value of convertible securities is also affected by
prevailing interest rates, the credit quality of the issuer and any call
provisions.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. (All Funds) The Funds may
purchase securities on a when-issued or delayed-delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the transaction. The New York Fund will only make commitments
to purchase municipal obligations on a when-issued basis with the intention of
actually acquiring the securities but may sell them before the settlement date
if it is deemed advisable. The when-issued securities are subject to market
fluctuation and no interest accrues to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
on a when-issued basis is a form of leveraging and can involve a risk that the
yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself in which case there could
be an unrealized loss at the time of delivery.
Each Fund will maintain liquid assets in segregated accounts with its
custodian in an amount at least equal in value to the Fund's commitments to
purchase when-issued securities. If the value of these assets declines, the Fund
will place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is equal to the amount of such commitments.
It is the current policy of the International Equity Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the obligations created by
when-issued commitments.
INVESTMENTS IN MUNICIPAL SECURITIES (the Fixed Income Fund). The Fixed Income
Fund may, when deemed appropriate by the Adviser and consistent with the
investment objective of the Fund, invest in obligations of state and local
governmental issuers which carry taxable yields that are comparable to yields of
other fixed-income instruments of comparable quality or, which the Adviser
believes possess the possibility of capital appreciation. Municipal obligations
may include bonds which may be categorized as
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either "general obligation" or "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are secured by the net
revenue derived from a particular facility or group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source, but
not by the general taxing power.
The Fund may also invest in municipal notes rated at least MIG-1 by Moody's or
SP-1 by S&P. Municipal notes will consist of tax anticipation notes, bond
anticipation notes, revenue anticipation notes and construction loan notes.
Notes sold as interim financing in anticipation of collection of taxes, a bond
sale or receipt of other revenues are usually general obligations of the issuer.
The Fund may also invest in municipal commercial paper, provided such
commercial paper is rated at least "Prime-1" by Moody's or "A-1" by S&P or, if
unrated, is of comparable investment quality as determined by the Adviser.
MONEY MARKET SECURITIES. (Fixed Income Fund and International Fund) Under
normal market conditions, the Fund may invest up to 20% of its total assets in
various money market instruments such as bank obligations, commercial paper,
variable rate master demand notes, shares of money market mutual funds, bills,
notes and other obligations issued by a U.S. company, the U.S. Government, a
foreign company or a foreign government, its agencies or instrumentalities
denominated in U.S. dollars. For temporary defensive purposes, each Fund may
invest 100% of its total assets in such money market instruments subject to
certain restrictions. All money market instruments will be limited to those
which carry a rating of MIG-1 or P-1 by Moody's or SP-1 or A-1 by S&P, or which
are comparably rated by another rating agency or, if unrated, are of comparable
quality as determined by the Adviser pursuant to guidelines established and
regularly reviewed by the Board of Trustees. During times when the Fund is
maintaining a temporary defensive posture, it may be unable to achieve fully its
investment objective.
(Growth and Income Fund and Mid Cap Fund) The Fund's investments in money market
instruments will consist of (i) short-term obligations of the U.S. Government,
its agencies and instrumentalities; (ii) other short-term debt securities rated
A or higher by Moody's or S&P or, if unrated, of comparable quality in the
opinion of the Adviser; (iii) commercial paper, including master demand notes;
(iv) bank obligations, including certificates of deposit, bankers' acceptances
and time deposits; and (v) repurchase agreements. At the time the Growth and
Income Fund invests for temporary defensive purposes in any commercial paper,
bank obligation or repurchase agreement, the issuer must have outstanding debt
rated A or higher by Moody's or S&P, or the issuer's parent corporation must
have outstanding commercial paper rated Prime-1 by Moody's or A-1 by S&P or, if
no such ratings are available, the investment must be of comparable quality in
the opinion of the Adviser. During times when the Fund is maintaining a
temporary defensive posture, it may be unable to achieve fully its investment
objective.
MUNICIPAL OBLIGATIONS. (New York Fund) To attempt to attain its investment
objective, the Fund invests in a broad range of Municipal Obligations which meet
the rating standards described in the Prospectus. The tax-exempt status of a
Municipal Obligation is determined by the issuer's bond counsel at the time of
the issuance of the security. Municipal Obligations, which pay interest that is
excludable from gross income for Federal income tax purposes and which are debt
obligations issued by or on behalf of states, cities, municipalities and other
public authorities, include:
MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of schools, highways and other
public facilities, for general operating expenses and for making loans to other
public institutions. Industrial development and pollution control bonds are
municipal bonds which are issued by or on behalf of public authorities to
provide funding for the construction, equipment, repair and improvement of
various privately operated facilities.
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Municipal bonds may be categorized as "general obligation" or "revenue" bonds.
General obligation bonds are secured by the issuer's pledge of its full faith,
credit and general taxing power for the payment of principal and interest.
Revenue bonds are secured by the net revenue derived from a particular facility
or group of facilities or, in some cases, the proceeds of a special excise or
other specific revenue source, but not by the general taxing power. Industrial
development and pollution control bonds (now generally referred to as "private
activity bonds") are, in most cases, revenue bonds and do not generally carry
the pledge of the credit of the issuing municipality or public authority.
MUNICIPAL NOTES. Municipal notes include, but are not limited to, tax
anticipation notes, bond anticipation notes, revenue anticipation notes,
construction loan notes and project notes. Notes sold as interim financing in
anticipation of collection of taxes, a bond sale or receipt of other revenues
are usually general obligations of the issuer. Project notes are issued by local
housing authorities to finance urban renewal and public housing projects and are
secured by the full faith and credit of the United States Government.
Investments in municipal notes are limited to notes which are rated at the date
of purchase "MIG-2" or better ("VMIG-2" or better in the case of variable rate
notes) by Moody's or "SP-2" or better by S&P or comparably rated by other
NRSROs, or, if not rated, are in the opinion of the New York Fund's investment
adviser, of comparable investment quality. (See Appendix for description of
ratings.)
MUNICIPAL COMMERCIAL PAPER. Municipal commercial paper is issued to finance
seasonal working capital needs or as short-term financing in anticipation of
longer-term debt. It is paid from the general revenues of the issuer or
refinanced with additional issuances of commercial paper or long-term debt.
Investments in municipal commercial paper are limited to issues rated "Prime-2"
or better by Moody's or "A-2" or better by S&P or comparably rated by other
NRSROs, or, if not rated, are in the opinion of the Fund's Adviser of comparable
investment quality.
After purchase by the New York Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Adviser will consider such event in its determination of whether the New York
Fund should continue to hold the security. To the extent the ratings given by a
NRSRO may change as a result of changes in such organizations or their rating
systems, the New York Fund will attempt to conform its rating systems to such
changes as standards for investments in accordance with the investment policies
contained in this Prospectus and in the Statement of Additional Information.
Although an investment in the New York Fund is not insured, certain of the
municipal obligations purchased by the New York Fund may be insured as to
principal and interest by companies that provide insurance for municipal
obligations. These obligations are identified as such in the New York Fund's
financial statements.
For purposes of diversification under the Investment Company Act of 1940, (the
"1940 Act") the identification of the issuer of New York Municipal Obligations
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision would be regarded as the sole issuer. Similarly, in the case of an
industrial development bond or pollution control bond, if the bond is backed
only by the assets and revenues of the non-governmental user, the non-
governmental user would be deemed to be the sole issuer. If in either case the
creating government or another entity guarantees an obligation, the guarantee
would be considered a separate security and be treated as an issue of such
government or entity.
NEW YORK OBLIGATIONS
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The New York Fund's assets will be invested primarily in municipal obligations
that are exempt from Federal, New York State and New York City income tax in the
opinion of bond counsel to the issuer and in participation certificates in such
obligations purchased from banks, insurance companies and other financial
institutions. Dividends paid by the New York Fund which are attributable to
interest income on tax-exempt obligations of the State of New York and its
political subdivisions, and of Puerto Rico, other U.S. territories or
possessions and their political subdivisions will be exempt from Federal, New
York State and New York City personal and corporate income taxes. The New York
Fund may purchase municipal obligations issued by other states, their agencies
and instrumentalities, the interest income on which will be exempt from Federal
income tax but will be subject to New York State and New York City personal and
corporate income taxes. As a matter of fundamental policy, the New York Fund
will invest no less than 80% of its net assets in New York obligations.
Opinions relating to the validity of municipal obligations (including New York
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 Trust nor the Adviser will review the proceedings relating to the
issuance of municipal obligations or the basis for such opinions.
The value of municipal securities may be affected by uncertainties in the
municipal market related to legislation or litigation involving the taxation of
municipal securities or the rights of municipal securities holders in the event
of a bankruptcy. Municipal bankruptcies are relatively rare, and certain
provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear
and remain untested. Further, the application of state law to municipal issuers
could produce varying results among the states or among municipal securities
issuers within a state. These legal uncertainties could affect the municipal
securities market generally, certain specific segments of the market, or the
relative credit quality of particular securities. Any of these effects could
have a significant impact on the prices of some or all of the municipal
securities held by the Fund.
THE NEW YORK FUND'S INVESTMENT IN TAXABLE SECURITIES. As described in the
Prospectus, the Fund may, with certain limitations, elect to invest in certain
taxable securities and repurchase agreements with respect to those securities.
The New York Fund may elect to invest up to 20% of the current value of its
total assets in securities subject to the Federal alternative minimum tax. In
addition, the Fund may invest up to 100% of its total assets in these and other
taxable securities to maintain a temporary "defensive" posture when, in the
opinion of the Fund's investment adviser, it is advisable to do so. During times
when the Fund is maintaining a temporary defensive posture, it may be unable to
fully achieve its investment objective.
The types of taxable securities (in addition to "alternative minimum tax"
securities) in which the Fund may invest are limited to the following money
market instruments which have remaining maturities not exceeding one year: (i)
obligations of the United States Government, its agencies or instrumentalities;
(ii) negotiable certificates of deposit and bankers' acceptances of United
States banks which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation; (iii) domestic commercial paper rated "P-1" by Moody's or
"A-1" or "A-1+" by S&P or comparably rated by another nationally recognized
statistical rating organization; and (iv) repurchase agreements. The Fund also
has the right to hold cash equivalents of up to 100% of its total assets when
the Fund's investment adviser deems it necessary for temporary defensive
purposes.
SECURITIES WITH PUT RIGHTS. (New York Fund) When the Fund purchases
municipal obligations it may obtain the right to resell them, or "put" them, to
the seller at an agreed upon price within a specific period prior to their
maturity date. These transactions are also known as "stand-by commitments."
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The amount payable to the Fund by the seller upon its exercise of a put will
normally be (i) the Fund's acquisition cost of the securities (excluding any
accrued interest which the Fund paid on their acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during the period the securities
were owned by the Fund. Absent unusual circumstances, the Fund values the
underlying securities at their amortized cost. Accordingly, the amount payable
by a broker-dealer or bank during the time a put is exercisable will be
substantially the same as the value of the underlying securities.
The Fund's right to exercise a put is unconditional and unqualified. A put is
not transferable by the Fund, although the Fund may sell the underlying
securities to a third party at any time. The Fund expects that puts will
generally be available without the payment of any direct or indirect
consideration. However, if necessary and advisable, the Fund may pay for
certain puts either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to such a put (thus reducing the yield to
maturity otherwise available for the same securities).
The Fund may enter into put transactions only with broker-dealers and banks
which, in the opinion of the Fund's Adviser, present minimal credit risks. The
Fund's ability to exercise a put will depend on the ability of the broker-dealer
or bank to pay for the underlying securities at the time the put is exercised.
In the event that a broker-dealer or bank should default on its obligation to
repurchase an underlying security, the Fund might be unable to recover all or a
portion of any loss sustained from having to sell the security elsewhere.
The Fund intends to enter into put transactions solely to maintain portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a put will not affect the valuation of the
underlying security which will continue to be valued in accordance with the
amortized cost method. The actual put will be valued at zero in determining net
asset value. Where the Fund pays directly or indirectly for a put, its cost
will be reflected as an unrealized loss for the period during which the put is
held by the Fund and will be reflected in realized gain or loss when the put is
exercised or expires. If the value of the underlying security increases, the
potential for unrealized or realized gain is reduced by the cost of the put.
FLOATING RATE INSTRUMENTS. Certain municipal obligations which the New York
Tax Free Fund may purchase have a floating or variable rate of interest. Such
obligations bear interest at rates which are not fixed, but which vary with
changes in specified market rates or indices, such as a Federal Reserve
composite index. Such obligations may carry a demand or "put" feature which
would permit the holder to tender them back to the issuer (or to a third party)
at par value prior to maturity. The Fund's investment adviser will monitor on an
ongoing basis the earning power, cash flow and other liquidity ratios of the
issuers of such obligations, and will similarly monitor the ability of an issuer
of a demand instrument to pay principal and interest on demand. The Fund's right
to obtain payment at par on a demand instrument could be affected by events
occurring between the date the Fund elects to demand payment and the date
payment is due, which may affect the ability of the issuer of the instrument to
make payment when due.
RISK FACTORS FOR THE NEW YORK FUND
The following information as to certain New York risk factors is given to
investors in view of the New York Fund's policy of concentrating its investments
in New York Municipal Obligation issuers. The factors affecting the financial
conditions of the State of New York (the "State") are complex, and the following
description constitutes only a brief summary; it does not purport to be a
complete description and is based on information from official statements
relating to general obligation bonds issued by the
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State of New York. The accuracy and completeness of the information contained in
such offering statements has not been independently verified.
Since the New York Fund invests primarily in obligations of New York issuers,
the marketability and market value of these obligations may be affected by long-
term economic problems which face New York City and New York State. In
particular, the ability of the State and the City to finance independently has
been adversely affected in the past by their inability to achieve or maintain
favorable credit ratings. There can also be an effect on the market price of
securities of other New York issuers if the City receives less favorable credit
ratings and if certain of its economic problems continue. If these problems are
not resolved, or if new ones develop, they could adversely affect the various
New York issuers' ability to meet their financial obligations. There can be no
assurance that New York City or the local entities, or the State, will not face
budget gaps in future years. The ability of the New York Fund to meet its
objective is affected by the ability of issuers to meet their payment
obligations. A default by an issuer of an obligation held by the New York Fund
could result in a substantial loss of principal with respect to that obligation
and a potential decline in the New York Fund's net asset value.
The New York Fund is permitted to invest up to 25% of the value of its total
assets in the securities of any one issuer without adhering to the 5% issuer
limitation described under "Investment Restrictions". To the extent that the New
York Fund invests up to 25% of its total assets in the securities of any one
issuer, there may be an increased risk of loss to the New York Fund.
NEW YORK STATE. The economy of the State (the "State") is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a comparatively small share of the
nation's farming and mining activity. The State has a declining portion of its
work force engaged in manufacturing, and an increasing portion engaged in
service industries, reflecting the national trend.
New York has a very high state and local tax burden relative to other states.
The State and its localities have used these taxes to develop and maintain their
transportation networks, public schools and colleges, public health systems, and
social services and recreational facilities. Despite these benefits, the burden
of state and local taxation may have contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the State.
National economic growth during both 1998 and 1999 is expected to be
slower thanit was during 1997. The financial and economic turmoil which started
in Asia and has spread to other parts of the world is expected to continue to
negatively affect U.S. trade balances throughout most of 1999. In addition,
growth in domestic consumption, which has been a major driving force behind the
nation's strong economic performance in recent years, is expected to slow in
1999 as consumer confidence retreats from historic highs and the stock market
ceases to provide large amounts of extra discretionary income. However, the
lower short-term interest rates which are expected to be in force during 1999
should help prevent a recession. The revised forecast projects real GDP growth
of 3.4 percent in 1998, moderately below the 1997 growth rate. In 1999, real GDP
growth is expected to fall further, to 1.6 percent. The growth of nominal GDP is
projected to decline from 5.9 percent in 1997 to 4.6 percent in 1998 and 3.7
percent in 1999. The inflation rate is expected to drop to 1.7 percent in 1998
before rising to 2.7 percent in 1999. The annual rate of job growth is expected
to be 2.5 percent in 1998, almost equaling the strong growth rate experienced in
1997. In 1999, however, employment growth is forecast to slow markedly, to 1.9
percent. Growth in personal income and wages is expected to slow in 1998 and
again in 1999.
Continued growth is projected for New York State in 1998 and 1999 for
employment, wages, and personal income, although, for 1999, a significant
slowdown in the growth rates of personal income and wages are expected. The
growth of personal income is projected to rise from 4.7 percent in 1997 to 5.0
percent in 1998, but then drop to 3.4 percent in 1999, in part because growth in
bonus payments is expected to moderate significantly, a distinct shift from the
unusually high increases of the last few years. Overall employment growth is
expected to be 2.0 percent in 1998, the strongest in a decade, but is expected
to drop to 1.0 percent in 1999, reflecting the slowing growth of the national
economy, continued spending restraint in government, less robust profitability
in the financial sector and continued restructuring in the manufacturing, health
care, and banking sectors.
THE STATE BUDGET PROCESS. The requirements of the State budget process are
set forth in Article VII of the State Constitution and the State Finance law.
The process begins with the Governor's submission of the Executive Budget to the
Legislature each January, in preparation for the start of the fiscal year on
April 1. (The submission date is February 1 following a gubernatorial
election.) The budget must contain a complete plan of available receipts and
projected disbursements for the ensuing fiscal year ("State Financial Plan").
That proposed State Financial Plan must be balanced on a cash basis, and must be
accompanied by bills which: (i) set forth all proposed appropriations and
reappropriations, (ii) provide for any new or modified revenue measures, and
(iii) make any other changes to existing law necessary to implement the budget
recommended by the Governor.
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In acting on the bills submitted by the Governor, the Legislature has the
power to alter both recommended appropriations and proposed changes to
substantive law. The Legislature may strike out or reduce an item of
appropriation recommended by the Governor. The Legislature may add items of
appropriation provided such additions are stated separately. These additional
items are then subject to line-item veto by the Governor. If the Governor vetoes
an appropriation or a bill related to the budget, these can be reconsidered in
accordance with the rules of each house of the Legislature. If approved by two-
thirds of the members of each house, the measure will become law notwithstanding
the Governor's veto.
Once the appropriation and other bills become law, the State's Division of the
Budget ("DOB") revises the State Financial Plan based on the Legislatures'
action, and begins the process of implementing the budget. Throughout the fiscal
year, DOB monitors actual receipts and disbursements, and may adjust the
estimates in the State Financial Plan. Adjustments may also be made to the State
Financial Plan to reflect changes in the economy, as well as new actions taken
by the Governor or the Legislature.
The Governor is required to submit to the Legislature quarterly budget updates
which include a revised cash-basis State Financial Plan, and an explanation of
any changes from the previous State Financial Plan. As required by the State
Finance law, the Governor updates the State Financial Plan within 30 days of the
close of each quarter of the fiscal year, generally issuing reports by July 30,
October 30, and as part of the Executive Budget.
1998-99 Fiscal Year - The Legislature adopted the debt service component of the
State budget for the 1998-99 fiscal year on March 30, 1998 and the remainder of
the budget on April 18, 1998. In the period prior to adoption of the budget for
the current fiscal year, the Legislature also enacted appropriations to permit
the State to continue its operations and provide for other purposes. On April
25, 1998, the Governor vetoed certain items that the Legislature added to the
Executive Budget. The Legislature had not overridden any of the Governor's
vetoes as of the start of the legislative recess on June 19, 1998 (under the
State Constitution, the Legislature can override one or more of the Governor's
vetoes with the approval of two-thirds of the members of each house).
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General Fund disbursements in 1998-99 are now projected to grow by $2.43
billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax reduction
initiatives, including acceleration of State-funded property and local income
tax relief for senior citizens under the School Tax Relief Program (STAR),
expansion of the child care income-tax credit for middle- income families, a
phased-in reduction of the general business tax, and reduction of several other
taxes and fees, including an accelerated phase-out of assessments on medical
providers. The enacted budget also provides for significant increases in
spending for public schools, special education programs, and for the State and
City university systems. It also allocates $50 million for a new Debt Reduction
Reserve Fund (DRRF) that may eventually be used to pay debt service costs on or
to prepay outstanding State- supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the General
Fund of $1.42 billion that is comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund (TSRF), a balance of $158 million in the Community Projects Fund (CPF), and
a balance of $100 million in the Contingency Reserve Fund (CRF). The TSRF can be
used in the event of an unanticipated General Fund cash operating deficit, as
provided under the State Constitution and State Finance Law. The CPF is used to
finance various legislative and executive initiatives. The CRF provides
resources to help finance any extraordinary litigation costs during the fiscal
year.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The Division of Budget believes that
its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth herein, and those projections may be changed materially
and adversely from time to time. See "Special Considerations" below for a
discussion of risks and uncertainties faced by the State.
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Second Update (current fiscal year) - On October 30, 1998, the State
issued the second of its three quarterly updates to the 1998-99 Financial Plan.
In the Mid-Year Update, the State continues to project that the State Financial
Plan for 1998-99 will remain in balance. The State now projects total receipts
in 1998-99 of $37.84 billion, an increase of $29 million over the amount
projected in the First Quarterly Update. The State has made no changes to its
July disbursement projections, with total disbursements of $36.78 billion
expected for the current fiscal year. The additional receipts increase the
State's projected surplus (reserve for future needs) by $29 million over the
July estimate, to $1.04 billion.
The Financial Plan now projects a closing balance in the General Fund of
$1.7 billion. The balance is comprised of the $1.04 billion reserve for future
needs, $400 million in the Tax Stabilization Reserve Fund, $100 million in the
Contingency Reserve Fund (after a planned deposit of $32 million in 1998-99),
and $158 million in the Community Projects Fund.
The State ended the first six months of 1998-99 fiscal year with a General
Fund cash balance of $5.02 billion, roughly $143 million higher than projected
in the cash flow accompanying the July Update to the Financial Plan. Total
receipts, including transfers from other funds, were approximately $52 million
higher than expected, with the increase comprised of additional tax revenues
($22 million) and transfers from other funds ($30 million). Total spending
through the first six months of the fiscal year was $16.28 billion, or $91
million lower than projected in July. This variance resulted primarily from
higher spending in Grants to Local Governments ($27 million), offset by lower
spending in State Operations ($124 million). These variances are timing-related
and should not affect total disbursements for the fiscal year.
Outyear Projections Of Receipts And Disbursements - State law requires
the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999- 00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of higher-than-
projected tax receipts and in lower-than-expected entitlement spending. However,
the State's projections in 1999-00 currently assume actions to achieve $600
million in lower disbursements and $250 million in additional receipts from the
settlement of State claims against the tobacco industry. Consistent with past
practice, the projections do not include any costs associated with new
collective bargaining agreements after the expiration of the current round of
contracts at the end of the 1998-99 fiscal year. The State expects that the
1999-00 Financial Plan will achieve savings from initiatives by State agencies
to deliver services more efficiently, workforce management efforts, maximization
of federal and non-General Fund spending offsets, and other actions necessary to
bring projected disbursements and receipts into balance.
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The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999- 00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The STAR program, which dedicates a portion of
personal income tax receipts to fund school tax reductions, has a significant
impact on General Fund receipts. STAR is projected to reduce personal income tax
revenues available to the General Fund by an estimated $1.3 billion in 2000-01.
Measured from the 1998-99 base, scheduled reductions to estate and gift, sales
and other taxes, reflecting tax cuts enacted in 1997-98 and 1998-99, will lower
General Fund taxes and fees by an estimated $1.8 billion in 2000-01.
Disbursement projections for the outyears currently assume additional outlays
for school aid, Medicaid, welfare reform, mental health community reinvestment,
and other multi-year spending commitments in law. See "Special Considerations"
below for a description of other risks and uncertainties associated with the
State Financial Plan process.
Special Considerations - The economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. These factors can be very complex, may vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State and
its agencies and instrumentalities, but also by entities, such as the federal
government, that are not under the control of the State. Because of the
uncertainty and unpredictability of these factors, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience results in
the current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
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Projections of total State receipts in the Financial Plan are based on the
State tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the federal
government, and changes in the demand for and use of State services.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth herein. In the past, the
State has taken management actions to address potential Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
Despite recent budgetary surpluses recorded by the State, actions affecting
the level of receipts and disbursements, the relative strength of the State and
regional economy, and actions by the federal government have helped to create
projected structural budget gaps for the State. These gaps result from a
significant disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State would be required to take actions
to increase receipts and/or or reduce disbursements as it enacts the budget for
that year, and, under the State Constitution, the Governor is required to
propose a balanced budget each year. There can be no assurance, however, that
the Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years. For example,
the fiscal effects of tax reductions adopted in the last several fiscal years
(including 1998-99) are projected to grow more substantially beyond the 1998-99
fiscal year, with the incremental annual cost of all currently enacted tax
reductions estimated at over $4 billion by the time they are fully effective in
State fiscal year 2002-03. These actions will place pressure on future budget
balance in New York State.
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1998-99 State Financial Plan - Four governmental fund types comprise the State
Financial Plan: the General Fund, the Special Revenue Funds, the Capital
Projects Funds, and the Debt Service Funds.
General Fund
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1998-99 fiscal year, the General Fund is expected to account for
approximately 47.6 percent of all Governmental Funds disbursements and 70.1
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types. Total receipts and transfers from
other funds are projected to be $37.56 billion, an increase of $3.01 billion
from the 1997-98 fiscal year. Total General Fund disbursements and transfers to
other funds are projected to be $36.78 billion, an increase of $2.43 billion
from the 1997-98 fiscal year.
Projected General Fund Receipts
Total General Fund receipts in 1998-99 are projected to be $37.56 billion,
an increase of over $3 billion from the $34.55 billion recorded in 1997-98. This
total includes $34.36 billion in tax receipts, $1.40 billion in miscellaneous
receipts, and $1.80 billion in transfers from other funds.
The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the "real" growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998- 99 and the impact of
statutes earmarking certain tax receipts to other funds work to depress apparent
growth below the underlying growth in receipts attributable to expansion of the
State's economy. On an adjusted basis, State tax revenues in the 1998-99 fiscal
year are projected to grow at approximately 7.5 percent, following an adjusted
growth of roughly nine percent in the 1997-98 fiscal year. The discussion below
summarizes the State's projections of General Fund taxes and other revenues for
the 1998-99 Fiscal year.
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The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based with certain modifications on federal definitions of
income and deductions. This tax continues to account for over half of the
State's General Fund receipts base. Net personal income tax collections are
projected to reach $21.24 billion, nearly $3.5 billion above the reported
1997-98 collection total. Since 1997 represented the completion of the 20
percent income tax reduction program enacted in 1995, growth from 1997 to 1998
will be unaffected by major income tax reductions. Adding to the projected
annual growth is the net impact of the transfer of the surplus from 1997-98 to
the current year which affects reported collections by over $2.4 billion on a
year-over-year basis, as partially offset by the diversion of slightly over $700
million in income tax receipts to the STAR fund to finance the initial year of
the school tax reduction program. The STAR program was enacted in 1997 to
increase the State share of school funding and reduce residential school taxes.
Adjusted for these transactions, the growth in net income tax receipts is
roughly $1.7 billion, an increase of over 9 percent. This growth is largely a
function of over 8 percent growth in income tax liability projected for 1998 as
well as the impact of the 1997 tax year settlement on 1998-99 net collections.
User taxes and fees are comprised of three-quarters of the State four
percent sales and use tax (the balance, one percent, flows to support Local
Government Assistance Corporation (LGAC) debt service requirements), cigarette,
alcoholic beverage, container, and auto rental taxes, and a portion of the motor
fuel excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage license fees. A portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.
Receipts from user taxes and fees are projected to total $7.14 billion, an
increase of $107 million from reported collections in the prior year. The sales
tax component of this category accounts for all of the 1998-99 growth, as
receipts from all other sources decline $100 million. The growth in yield of the
sales tax in 1998-99, after adjusting for tax law and other changes, is
projected at 4.7 percent. The yields of most of the excise taxes in this
category show a long-term declining trend, particularly cigarette and alcoholic
beverage taxes. These General Fund declines are exacerbated in 1998-99 by
revenue losses from scheduled and newly enacted tax reductions, and by an
increase in earmarking of motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross-receipts-
based taxes on utilities and gallonage-based petroleum business taxes. Beginning
in 1994, a 15 percent surcharge on these levies began to be phased out and, for
most taxpayers, there is no surcharge liability for taxable periods ending in
1997 and thereafter.
Total business tax collections in 1998-99 are now projected to be $4.96
billion, $91 million less than received in the prior fiscal year. The category
includes receipts from the largely income-based levies on general business
corporations, banks and insurance companies, gross receipts taxes on energy and
telecommunication service providers and a per-gallon imposition on petroleum
business. The year-over-year decline in projected receipts in this category is
largely attributable to statutory changes between the two years. These include
the first year of utility-tax rate cuts and the Power for Jobs tax reduction
program for energy providers, and the scheduled additional diversion of General
Fund petroleum business and utility tax receipts to other funds. In addition,
profit growth is also expected to slow in 1998.
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Other taxes include estate, gift and real estate transfer taxes, a tax on
gains from the sale or transfer of certain real estate (this tax was repealed in
1996), a pari-mutuel tax and other minor levies. They are now projected to total
$1.02 billion -- $75 million below last year's amount. Two factors account for a
significant part of the expected decline in collections from this category.
First, the effects of the elimination of the real property gains tax
collections; second, a decline in estate tax receipts, following the explosive
growth recorded in 1997-98, when receipts expanded by over 16 percent.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are projected to reach $1.40 billion, down almost $200
million from the prior year, reflecting the loss of non-recurring receipts in
1997-98 and the growing effects of the phase-out of the medical provider
assessments.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one percent
sales tax used to support payments to LGAC. Transfers from other funds are
expected to total $1.8 billion, or $222 million less than total receipts from
this category during 1997-98. Total transfers of sales taxes in excess of LGAC
debt service requirements are expected to increase by approximately $51 million,
while transfers from all other funds are expected to fall by $273 million,
primarily reflecting the absence, in 1998-99, of a one-time transfer of nearly
$200 million for retroactive reimbursement of certain social services claims
from the federal government. Projected General Fund Disbursements
General Fund disbursements in 1998-99, including transfers to support
capital projects, debt service and other funds are estimated at $36.78 billion.
This represents an increase of $2.43 billion or 7.1 percent from 1997-98. Nearly
one-half of the growth is for educational purposes, reflecting increased support
for public schools, special education programs and the State and City university
systems. The remaining increase is primarily for Medicaid, mental hygiene, and
other health and social welfare programs, including children and family
services. The 1998-99 Financial Plan also includes funds for the current
negotiated salary increases for State employees, as well as increased transfers
for debt service.
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
1998-99 Financial Plan projects spending of $25.14 billion in this category, an
increase of $1.88 billion or 8.1 percent over the prior year. The largest annual
increases are for educational programs, Medicaid, other health and social
welfare programs, and community projects grants.
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The 1998-99 budget provides $9.65 billion in support of public schools. The
year-to-year increase of $769 million is comprised of partial funding for a
1998-99 school year increase of $847 million as well as the remainder of the
1997-98 school year increase that occurs in State fiscal year 1998- 99. Spending
for all other educational programs, which includes the State and City university
systems, the Tuition Assistance Programs, and handicapped programs, is estimated
at $3.00 billion, an increase of $270 million over 1997-98 levels.
Medicaid costs are estimated at $5.60 billion, an increase of $144 million
from the prior year. After adjusting 1997-98 for the $116 million prepayment of
an additional Medicaid cycle, Medicaid spending is projected to increase $260
million or 4.9 percent. Disbursements for all other health and social welfare
programs are projected to total $3.63 billion, an increase of $131 million from
1997-98. This includes an increase in support for children and families and
local public health programs, offset by a decline in welfare spending of $75
million that reflects continuing State and local efforts to reduce welfare
fraud, declining caseloads, and the impact of State and federal welfare reform
legislation.
Remaining disbursements primarily support community-based mental hygiene
programs, community and public health programs, local transportation programs,
and revenue sharing payments to local governments. Revenue sharing and other
general purpose aid to local governments are projected at $837 million, an
increase of approximately $37 million from 1997-98.
State operations spending reflects the administrative costs of operating
the State's agencies, including the prison system, mental hygiene institutions,
the State University system (SUNY), the Legislature, and the court system.
Personal service costs account for approximately 73 percent of spending in this
category. Since January 1995, the State's workforce has been reduced by about 10
percent and is projected to remain at its current level of approximately 191,000
persons in 1998-99.
State operations spending is projected at $6.70 billion, an increase of
$511 million of 8.3 percent from the prior year. This increase is primarily due
to an additional payroll cycle in 1998-99, a 3.5 percent general salary increase
on October 1, 1998 for most State employees, the loss of federal receipts that
would otherwise lower General Fund spending in mental hygiene programs, and a
projected 15.6 percent increase in the Judiciary's budget.
General State charges account primarily for the costs of providing
fringe benefits for State employees, including contributions to pension systems,
the employer's share of social security contributions, employer contributions
toward the cost of health insurance, and the costs of providing worker's
compensation and unemployment insurance benefits. This category also reflects
certain fixed costs such as payments in lieu of taxes, and payments of judgments
against the State or its public officers.
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Disbursements in this category are estimated at $2.22 billion, a
decrease of $50 million from the prior year. This annual decline reflects
projected decreases in pension costs and Court of Claims payments, offset by
modest projected increases for health insurance contributions, social security
costs, and the loss of reimbursements due to a reduction in the fringe benefit
rate charged to positions financed by non-General Fundsources.
Debt service paid from the General Fund reflects debt service on short-term
obligations of the State, and includes only interest costs on the State's
commercial paper program. The 1998-99 debt service estimate is $11 million,
reflecting relative stability in short-term interest rates. The State's
short-term TRAN borrowing program was eliminated in 1995.
Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources.
Transfers in support of debt service are projected at $2.13 billion in
1998-99, an increase of $110 million from 1997-98. The increase reflects the
impact of certain prior year bond sales (net of refunding savings), and certain
bond sales planned to occur during the 1998-99 fiscal year. The State Financial
Plan also establishes a transfer of $50 million to the new Debt Reduction
Reserve Fund. The Fund may be used, subject to enactment of new appropriations,
to pay the debt service costs on or to prepay State- supported bonds.
Transfers in support of capital projects provide General Fund support for
projects not otherwise financed through bond proceeds, dedicated taxes and other
revenues, or federal grants. These transfers are projected at $200 million for
1998-99, comparable to last year.
Remaining transfers from the General Fund to other funds are estimated to
decline $59 million in 1998-99 to $327 million. This decline is primarily the
net impact of one-time transfers in 1997-98 to the State University Tuition
Stabilization Fund and to the Lottery Fund to support school aid, offset by a
1998-99 increase in the State subsidy to the Roswell Park Cancer Research
Institute.
Non-recurring Resources
The Division of the Budget estimates that the 1998-99 State Financial Plan
contains actions that provide non-recurring resources or savings totaling
approximately $64 million, the largest of which is a retroactive reimbursement
of federal welfare claims.
The 1998-99 Financial Plan projects a closing fund balance in the General
Fund of $1.42 billion. This fund balance is composed of a reserve of $761
million available for future needs, a $400 million balance in the TSRF, a $158
million balance in the CPF, and a balance of $100 million in the CRF, after a
projected deposit of $32 million in 1998-99.
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Other Governmental Funds
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds which are discussed
below. Amounts below do not include other sources and uses of funds transferred
to or from other fund types.
Special Revenue Funds
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise approximately 41
percent of total governmental funds receipts in the 1998-99 fiscal year,
three-quarters of that activity relates to federally-funded programs.
Total disbursements for programs supported by Special Revenue Funds are
projected at $29.97 billion, an increase of $2.32 billion or 8.4 percent from
1997-98. Federal grants account for approximately three-quarters of all spending
in the Special Revenue fund type. Disbursements from federal funds are estimated
at $21.78 billion, an increase of $1.12 billion or 5.4 percent. The single
largest program in this fund group is Medicaid, which is projected at $13.65
billion, an increase of $465 million or 3.5 percent above last year. Federal
support for welfare programs is projected at $2.53 billion, similar to 1997-98.
The remaining growth in federal funds is primarily due to the new Child Health
Plus program, estimated at $197 million in 1998-99. This program will expand
health insurance coverage to children of indigent families.
State special revenue spending is projected to be $8.19 billion, an
increase of $1.20 billion or 17.2 percent from last year's levels. Most of this
projected increase in spending is due to the $704 million cost of the first
phase of the STAR program, as well as $231 million in additional operating
assistance for mass transportation, and $113 million for the State share of the
new Child Health Plus program.
Capital Projects Funds
Capital Projects Funds account for the financial resources used in 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 receipts transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1998-99 fiscal year, activity in these funds
is expected to comprise 5.5 percent of total governmental receipts.
Capital Projects Funds spending in fiscal year 1998-99 is projected at
$4.14 billion, an increase of $575 million or 16.1 percent from last year. The
major components of this expected growth are transportation and environmental
programs, including continued increased spending for 1996 Clean Water/Clean Air
Bond Act projects and higher projected disbursements from the Environmental
Protection Fund (EPF). Another significant component of this projected increase
is in the area of public protection, primarily for facility rehabilitation and
construction of additional prison capacity.
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Debt Service Funds
Debt Service Funds are used to account for the payment of principal and
interest on long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund type is expected to comprise 3.8 percent of total governmental fund
receipts in the 1998-99 fiscal year. Receipts in these funds in excess of debt
service requirements may be transferred to the General Fund, Capital Projects
Funds and Special Revenue Funds, pursuant to law.
Total disbursements form the Debt Service Fund type are estimated at $3.36
billion in 1998-99, an increase of $275 million or 8.9 percent from 1997-98
levels. Of the increase, $102 million is for transportation purposes, including
debt service on bonds issued for State and local highway and bridge programs
financed through the New York State Thruway Authority and supported by the
Dedicated Highway and Bridge Trust Fund. Another $45 million is for education
purposes, including State and City University programs financed through the
Dormitory Authority of the State of New York (DASNY). The remainder is for a
variety of programs in such areas as mental health and corrections, and for
general obligation financings.
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Cash-Basis Results for Prior Fiscal Years
The State reports its financial results on two bases of accounting: the
cash basis, showing receipts and disbursements; and the modified accrual basis,
prescribed by Generally Accepted Accounting Principles ("GAAP"), showing
revenues and expenditures.
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LitigationState Finance Policies
Insurance Law
Proceedings have been brought by two groups of petitioners challenging
regulations promulgated by the Superintendent of Insurance that established
excess medical malpractice premium rates for fiscal years 1986-87 through
1996-97 (New York State Health Maintenance Organization Conference, Inc., et al.
v. Muhl, et al. ["HMO"], and New York State Conference of Blue Cross and Blue
Shield Plans, et al. v. Muhl, et al. ["Blue Cross 'I' and 'II'"], Supreme Court,
Albany County). By order filed January 22, 1997, the Court in Blue Cross I
permitted the plaintiffs in HMO to intervene and dismissed the challenges to the
rates for the period prior to 1995-96. By decision dated July 24, 1997, the
Court in Blue Cross I held that the determination made by the Superintendent in
establishing the 1995-96 rate was arbitrary and capricious and directed that
premiums paid pursuant to that determination be returned to the payors. The
State has appealed this decision. The petitioners did not cross appeal. In Blue
Cross II, by amended judgment dated April 2, 1998, the Supreme Court annulled
the regulation setting the 1996-97 premium rate and directed that all 1996-97
excess malpractice premiums be returned to the payors. The State will not be
obligated in either case to pay moneys to any petitioner. Adverse determinations
would result in refunds from the affected insurers.
Tax Law
In New York Association of Convenience Stores, et al. v. Urbach, et
al., petitioners, New York Association of Convenience Stores, National
Association of Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek
Stores, Inc. seek to compel respondents, the Commissioner of Taxation and
Finance and the Department of Taxation and Finance, to enforce sales and excise
taxes imposed pursuant to Tax Law Articles 12-A, 20 and 28 on tobacco products
and motor fuel sold to non-Indian consumers on Indian reservations. In orders
dated August 13, 1996 and August 24, 1996, the Supreme Court, Albany County,
ordered, inter alia, that there be equal implementation and enforcement of said
taxes for sales to non-Indian consumers on and off Indian reservations, and
further ordered that, if respondents failed to comply within 120 days, no
tobacco products or motor fuel could be introduced onto Indian reservations
other than for Indian consumption or, alternately, the collection and
enforcement of such taxes would be suspended statewide. Respondents appealed to
the Appellate Division, Third Department, and invoked CPLR 5519(a)(1), which
provides that the taking of the appeal stayed all proceedings to enforce the
orders pending the appeal. Petitioner's motion to vacate the stay was denied. In
a decision entered May 8, 1997, the Third Department modified the orders by
deleting the portion thereof that provided for the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco products. The Third Department held, inter alia, that petitioners had
not sought such relief in their petition and that it was an error for the
Supreme Court to have awarded such undemanded relief without adequate notice of
its intent to do so. On May 22, 1997, respondents appealed to the Court of
Appeals on other grounds, and again invoked the statutory stay. On October 23,
1997, the Court of Appeals granted petitioners' motion for leave to cross-appeal
from the portion of the Third Department's decision that deleted the statewide
suspension of the enforcement and collection of the sales and excise taxes on
motor fuel and tobacco. The case was argued before the Court of Appeals on March
24, 1998.
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Clean Water/Clean Air Bond Act of 1996
In Robert L. Schulz, et al. v. The New York State Executive, et al.
(Supreme Court, Albany County, commenced October 16, 1996), plaintiffs challenge
the enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
law for some single work or purpose distinctly specified therein and forbidding
incorporation of other statutes byreference.
In an opinion dated June 9, 1998, the Court of Appeals affirmed the
July 17, 1997 order of the Appellate Division, Third Department, affirming the
lower court dismissal of this case.
Line Item Veto
In an action commenced in June 1998 by the Speaker of the Assembly of the
State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998.
STATE PROGRAMS
MEDICAID. Several cases, including Port Jefferson Health Care Facility, et
al. v. Wing (Supreme Court, Suffolk County), challenge the constitutionality of
Public Health Law (S)2807-d, which imposes a tax on the gross receipts hospitals
and residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public Health Law (S)(S)2807-d(2)(b)(ii) and 2807d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997 enforced
the terms of the decision. The State has appealed that order.
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SHELTER ALLOWANCE. In an action commenced in March 1987 against State and New
York City officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York
County), plaintiffs allege that the shelter allowance granted to recipients of
public assistance is not adequate for proper housing. In a decision dated April
16, 1997, the Court held that the shelter allowance promulgated by the
Legislature and enforced through Department of Social Services regulations is
not reasonably related to the cost of rental housing in New York City and
results in homelessness to families in New York City. A judgement was entered
on July 25, 1997, directing, among other things, that the State (i) submit a
proposed schedule of shelter allowances (for the Aid to Dependent Children
program and any successor program) that bears a reasonable relation to the cost
of housing in New York City; and (ii) compel the New York City Department of
Social Services to pay plaintiffs a monthly shelter allowance in the full amount
of their contract rents, provided they continue to meet the eligibility
requirements for public assistance, until such time as a lawful shelter
allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State has sought relief from each and every
provision of this judgement except that portion directing the continued
provision of interim relief.
CIVIL RIGHTS CLAIMS. In an action commenced in 1980 (United States, et al. v.
Yonkers Board of Education, et al.), the United States District Court for the
Southern District of New York found, in 1985, that Yonkers and its public
schools were intentionally segregated. In 1986, the District Court ordered
Yonkers to develop and comply with a remedial educational improvement plan ("EIP
I"). On January 19, 1989, the District Court granted motions by Yonkers and the
NAACP to add the State Education Department, the Yonkers Board of Education, and
the State Urban Development Corporation as defendants, based on allegations that
they had participated in the perpetuation of the segregated school system. On
August 30, 1993, the District Court found that vestiges of a dual school system
continued to exist in Yonkers. On March 27, 1995, the District Court made
factual findings regarding the role of the State and other State defendants (the
"State") in connection with the creation and maintenance of the dual school
system, but found no legal basis for imposing liability. On September 3, 1996,
the Court of Appeals, based on the District Court's factual findings, held the
State defendants liable under 42 USC (S)1983 and the Equal Educational
Opportunity Act, 20 USC (S)(S)1701, et seq., for the unlawful dual school
system, because the State, inter alia, had taken no action to force the school
district to desegregate despite its actual or constructive knowledge of de jure
segregation. By Order dated October 8, 1997, the District Court held that
vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed educational
improvement plan ("EIP II") to eradicate these vestiges of segregation. The
October 8, 1997 Order of the District Court ordered that EIP II be implemented
and directed that, within 10 days of the entry of the Order, the State made
available to Yonders $450,000 to support planning activities to prepare the EIP
II budget for 1997-98 and the accompanying capital facilities plan. A final
judgment to implement EIP II was entered on October 14, 1997. The State intends
to appeal that judgment. Additionally, the Court adopted a requirement that the
State pay to Yonkers $9 million as its pro rata share of the funding of EIP I
for the 1996-97 school year. The requirement for State funding of EIP I has not
yet been reduced to an order.
CONTRACT AND TORT CLAIMS. In Inter-Power of New York, Inc. v. State of New
York, commenced November 16, 1994 in the Court of Claims, plaintiff alleges that
by reason of the failure of the State's Department of Environmental Conservation
to provide in a timely manner accurate and complete data, plaintiff was unable
to complete by the projected completion date a cogeneration facility, and
thereby suffered damages. The parties have agreed to settle this case for $29
million.
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Public Authorities
The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. For the purposes of this summary, public
authorities refer to public benefit corporations created pursuant to State law,
other than local authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which apply to the State
itself and may issue bonds and notes within the amounts and restrictions set
forth in legislative authorization. The State's access to the public credit
markets could be impaired and the market price of its outstanding debt may be
materially and adversely affected if any of its public authorities were to
default on their respective obligations. As of December 31, 1997, there were 17
public authorities that had outstanding debt of $100 million or more, and the
aggregate outstanding debt, including refunding bonds, of all State authorities
was $84 billion, only a portion of which constitutes State-supported or State-
related debt.
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authorities generally pay their operating expenses and debt
service costs from revenues generated by the projects they finance or operate,
such as tolls charged for the use of highways, bridges or tunnels, charges for
public power, electric and gas utility services, rentals charged for housing
units, and charges for occupancy at medical care facilities. Also, there are
statutory arrangements providing for State local assistance payments otherwise
payable to localities to be made under certain circumstances to public
authorities. Although the State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
public authorities under these arrangements, the affected localities may seek
additional State assistance if local assistance payments are diverted. Some
authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to provide transit and commuter
services.
Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan. As of the
date of this AIS, LIPA has issued over $5 billion in bonds secured solely by
ratepayer charges. LIPA's debt is not considered either State- supported or
State-related debt.
Metropolitan Transportation Authority - The MTA oversees the operation of subway
and bus lines in New York City by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus
services in the New 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 on, and will continue to
depend on, operating support from the State, local governments and TBTA,
including loans, grants and subsidies. If current revenue projections are not
realized and/or operating expenses exceed current projections, the TA or
commuter railroads may be required to seek additional State assistance, raise
fares or take other actions.
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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.
Since 1987, State law also has required that the proceeds of a one-quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance to
the MTA. For the 1998- 99 fiscal year, State assistance to the MTA is projected
to total approximately $1.3 billion, an increase of $133 million over the 1997-
98 fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board ("CPRB") approved the 1995-99 Capital Program (subsequently
amended in August 1997), which supersedes the overlapping portion of the MTA's
1992-96 Capital Program. The 1995-99 Capital Program is the fourth capital plan
since the Legislature authorized procedures for the adoption, approval and
amendment of MTA capital programs and is designed to upgrade the performance of
the MTA's transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The 1995-99 Capital Program assumes the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan is projected to be financed through
assistance from the State, the federal government, and the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1995-99 Capital Program, or
parts thereof, will not be delayed or reduced. Should funding levels fall below
current projections, the MTA would have to revise its 1995- 99 Capital Program
accordingly. If the 1995-99 Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.
The City of New York
The fiscal health of the State may also be affected by the fiscal health of
New York City (the "City"), which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and to meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets.
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The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan ("Financial Plan") annually and updates
it periodically, and prepares a comprehensive annual financial report describing
its most recent fiscal year each October.
The City of New YorkFiscal Oversight
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for the City of New York to
provide financing assistance to the City; the New York State Financial Control
Board (the "Control Board") to oversee the City's financial affairs; and the
Office of the State Deputy Comptroller for the City of New York ("OSDC") to
assist the Control Board in exercising its powers and responsibilities. A
"control period" existed from 1975 to 1986 during which the City was subject to
certain statutorily-prescribed fiscal controls. The Control Board terminated the
Control Period in 1986 when certain statutory conditions were met. State law
requires the Control Board to reimpose a control period upon the occurrence, or
"substantial likelihood and imminence" of the occurrence, of certain events,
including (but not limited to) a City operating budget deficit of more than $100
million of impaired access to the public credit markets.
Currently, the City and its Covered Organizations (i.e., those which
received or may receive moneys from the City directly, indirectly or
contingently) operate under the Financial Plan. The City's Financial Plan
summarizes its capital, revenue and expense projections and outlines proposed
gap-closing programs for years with projected budget gaps. The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments and changes in major assumptions could significantly affect the
city's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City and certain entities
issuing debt for the benefit of the city must market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In 1997, the State created the New York City Transitional Finance Authority
("TFA") to finance a portion of the City's capital program because the City was
approaching its State Constitutional general debt limit. Without the additional
financing capacity of the TFA, projected contracts for City capital projects
would have exceeded the City's debt limit during City fiscal year 1997-98.
Despite this additional financing mechanism, the City currently projects that,
if no further action is taken, it will reach its debt limit in City fiscal year
1999-2000. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the TFA to be unconstitutional.
On November 25, 1997 the State Supreme Court found the legislation establishing
the TFA to be constitutional and granted the defendants' motion for summary
judgment. The plaintiffs have appealed the decision. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.
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Monitoring Agencies
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with the Financial Plan. According to recent staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and generated a substantial surplus for the City in City fiscal year 1996-97.
Recent staff reports also indicate that the City projects a substantial surplus
for City fiscal year 1997-98. Although several sectors of the City's economy
have expanded recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the continued
profitability of the securities industries and the course of the national
economy. These reports have also indicated that recent City budgets have been
balanced in part through the use of non-recurring resources and that the City's
Financial Plan tends to rely on actions outside its direct control. These
reports have indicated that the City has not yet brought its long-term
expenditure growth in line with recurring revenue growth and that the City is
likely to continue to face substantial gaps between forecast revenues and
expenditures in future years that must be closed with reduced expenditures
and/or increased revenues. In addition to these monitoring agencies, the
Independent Budget Office ("IBO") has been established pursuant to the City
Charter to provide analysis to elected officials and the public on relevant
fiscal and budgetary issues affecting the City.
Other Localities
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional oversight or financial
assistance is not included in the projections of the State's receipts and
disbursements for the State's 1998-99 fiscal year.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. Both of these
emergency aid packages were largely continued through the 1998- 99 budget. The
State also dispersed an additional $21 million among all cities, towns and
villages after enacting a 3.9 percent increase in General Purpose State Aid in
1997-98 and continued this increase in 1998-99.
The 1998-99 budget includes an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
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The appropriation and allocation of general purpose local government
aid among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts of general purpose local
government aid and recommend a new formula by June 30, 1999, which may change
the way aid is allocated.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1996, the total indebtedness of all localities in
the State other than New York City was approximately $20.0 billion. A small
portion (approximately $77.2 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
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INVESTMENT RESTRICTIONS
The Funds observe the following fundamental investment restrictions which can
be changed only when permitted by law and approved by a majority of a Fund's
outstanding voting securities. A "majority of the Fund's outstanding voting
securities" means the lesser of (i) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented in person or by
proxies or (ii) more than 50% of the outstanding shares.
Except as otherwise noted, each Fund may not:
(1) purchase securities on margin or purchase real estate or
interests therein, commodities or commodity contracts (except that
the International Fund, Growth and Income and Fixed Income Funds may
purchase and make margin payments in connection with financial
futures contracts and related options);
(2) with respect to 75% of its total assets (taken at market value),
purchase a security if as a result (1) more than 5% of its total
assets (taken at market value) would be invested in the securities
(including securities subject to repurchase agreements), of any one
issuer, other than obligations which are issued or guaranteed by the
United States Government, its agencies or instrumentalities or (2)
the Fund would own more than 10% of the outstanding voting
securities of such issuer.
(3) engage in the underwriting of securities of other issuers,
except to the extent that each Fund may be deemed to be an
underwriter in selling, as part of an offering registered under the
Securities Act of 1933, as amended, securities which it has
acquired;
(4) effect a short sale of any security (other than index options or
hedging strategies to the extent otherwise permitted), or issue
senior securities except as permitted in paragraph (5). For purposes
of this restriction, the purchase and sale of financial futures
contracts and related options does not constitute the issuance of a
senior security;
(5) borrow money, except that each Fund may borrow from banks where such
borrowings would not exceed 33-1/3% of its total assets (including the
amount borrowed) taken at market value; or pledge, mortgage or
hypothecate its assets, except to secure indebtedness permitted by
this paragraph and then only if such pledging, mortgaging or
hypothecating does not exceed 33-1/3% of each Fund's total assets
taken at market value;
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<PAGE>
(6) invest for the purpose of exercising control over management of
any company;
(7) invest more than 10% of its total assets in the securities of
other investment companies;
(8) invest in any security, including repurchase agreements maturing
in over seven days or other illiquid investments which are subject
to legal or contractual delays on resale or which are not readily
marketable, if as a result more than 15% of the market value of the
respective Fund's total assets would be so invested;
(9) purchase interests in oil, gas, or other mineral exploration
programs of real estate and real estate mortgage loans except as
provided in the Prospectus of the Funds; however, this policy will
not prohibit the acquisition of securities of companies engaged in
the production or transmission of oil, gas, other minerals or
companies which purchase or sell real estate or real estate mortgage
loans;
(10) have dealings on behalf of the Funds with Officers and Trustees
of the Funds, except for the purchase or sale of securities on an
agency or commission basis, or make loans to any officers, directors
or employees of the Funds;
(11) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of each Fund's
investments in that industry would exceed 25% of the current value
of a Fund's total assets, provided that (a) there is no limitation
with respect to investments in obligations of the United States
Government, its agencies or instrumentalities and in the case of the
New York Fund, investments in Municipal Obligations (for the purpose
of this restriction, industrial development and pollution control
bonds shall not be deemed Municipal Obligations if the payment of
principal and interest on such bonds is the ultimate responsibility
of nongovernmental users); (b) wholly-owned finance companies will
be considered to be in the industries of their parents; and (c)
utilities will be divided according to their services. For example,
gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry;
(12) make loans, except that each Fund may make loans or lend its
portfolio securities if, as a result, the aggregate of such loans
does not exceed 33-1/3% of the value of a Fund's total assets.
In addition, the Fixed Income Fund and New York Fund may not:
(13) purchase equity securities or other securities convertible into
equity securities.
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In addition, the New York Fund may not
(14) invest less than 80% of its net assets in New York Obligations except
when, in the opinion of the Fund's investment adviser, it is advisable for the
Fund to invest temporarily up to 100% of its total assets in taxable
securities to maintain a "defensive" posture because of unusual market
conditions. For instance, a "defensive" posture is warranted when the Fund's
assets exceed the available amount of municipal obligations that meet the
Fund's investment objective and policies.
It is the intention of the Funds, unless otherwise indicated, that with
respect to the Fund's policies that are the result of the application of law,
the Funds will take advantage of the flexibility provided by rules or
interpretations of the SEC currently in existence or promulgated in the future
or changes to such laws.
There will be no violation of any investment restriction if that restriction
is complied with at the time the relevant action is taken notwithstanding a
later change in the market value of an investment, in the net or total assets of
the Funds, in the securities rating of the investment, or any other later
change.
MANAGEMENT
TRUSTEES AND OFFICERS
The property affairs and business of the Fund are managed by the Board of
Trustees. The Trustees elect officers who are charged with the responsibility
for the day-to-day operations of the Funds and the execution of policies
formulated by the Trustees.
The principal occupations of the Trustees and executive officers of the Funds
for the past five years are listed below. The address of each, unless otherwise
indicated, is 3435 Stelzer Road, Columbus, Ohio 43219. Trustees deemed to be
"interested persons" of the Funds for purposes of the Investment Company Act of
1940, as amended, are indicated by an asterisk.
HARALD PAUMGARTEN, Chairman of the Board of Trustees - age 61, 405
Lexington Avenue, New York, NY 10017; Managing Director, Adirondack
Capital Group since 1997; President, Paumgarten and Company 1991 to
1997; Advisory Managing Director, Lepercq de Neuflize & Co.
Incorporated 1993 to 1995; Director, Price Waterhouse AG 1992 to
1993; Chairman of the Board of Trustees, HSBC Funds Trust.
ROBERT A. ROBINSON, Trustee - age 74, 251 Laurel Road, New Canaan,
Connecticut 06840. Trustee, Henrietta and E. Frederick H. Bugher
Foundation; Trustee, U.S.T. Master Funds, Inc. and U.S.T. Master Tax-
Exempt Funds, Inc. (mutual funds); Trustee, HSBC Funds Trust.
JOHN P. PFANN, Trustee - age 70, 43 Captains Walk, Marina Cove, Palm
Coast, Florida 32137. Chairman and President, JPP Equities, Inc.
1982 to 1995;
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Trustee, HSBC Funds Trust.
RICHARD J. LOOS, Trustee - Retired; President Aspen Capital Mgmt.,
1995-1996; Managing Director, HSBC Asset Management Americas Inc.
1972-1994, 97 Southport Wood Drive, Southport, CT 06490.
JEFFREY HASS, Trustee - age 37, 155 E 38th St., New York, NY 10016;
Associate Professor of Law, New York Law School 1996-Present;
Partner Hass & Hass 1993-1995.
CLIFTON H.W. MALONEY, Trustee - age 62, 49 E 92nd St., New York,
NY 10128; President, C.H.W. Maloney & Co., Inc., 1981-Present.
JOHN C. MEDITZ, Trustee, age 51, 21 Hamilton Ave., Weehawken,
NJ 07087; Portfolio Manager/Vice Chairman, Horizon Asset Management
1994-Present
WALLY GRIMM, President - Executive Vice President, Fund Services
Division of BISYS Fund Services, Inc., June 1992 to present.
ERIC F. ALMQUIST, Senior Vice President - Senior Marketing
Strategist, Fund Services Division, BISYS Fund Services, Inc.,
August, 1996 to present; Director of Process Management, Coopers &
Lybrand L.L.P. from 1994 to 1996; Vice President, The Dreyfus
Service Corporation from 1988 to 1994.
CHARLES BOOTH, Vice President - Chief Compliance Officer and Vice
President of Fund Administration, Fund Services Division of BISYS
Fund Services, Inc., 1988 to present.
Anthony J. Fischer, Vice President - Client Services, Fund Services
Division of BISYS Fund Services, Inc. from 1998 to present. SEI,
1997-1998 Paul T. Kane, Assistant Treasurer - Vice President and
Assistant Treasurer, Fund Services Division of BISYS Fund Services,
Inc., December 1997 to present; Director Shareholder Reporting,
September 1989 to December 1996, Fidelity Accounting and Custody
Services, 1985-1997.
STEVEN R. HOWARD, Secretary -1285 Avenue of the Americas, New York,
New York 10019. Partner, Paul, Weiss, Rifkind, Wharton & Garrison
since April, 1998; Partner, Baker & McKenzie 1991 to 1996; Partner,
Gaston & Snow from 1988 to 1991; Secretary, HSBC Funds Trust since
1987.
ALAINA V. METZ, Assistant Secretary - Chief Administrator,
Administration and Regulatory Services of BISYS Fund Services, Inc.,
June 1995 to Present; Supervisor of Mutual Fund Legal Department,
Alliance Capital Management, May 1989 to June 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Compensation from Benefits Accrued as Benefits Upon from the Fund
the Funds Part of Fund Expenses Retirement Complex*
<S> <C> <C> <C> <C>
Wolfe J. Frankl, Trustee** $______ 0 N/A $______
Richard J. Loos, $______ 0 N/A $______
Harald Paumgarten, Trustee $______ 0 N/A $______
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Jeffrey Hass $______ 0 N/A $______
Clifton Maloney $______ 0 N/A $______
John P. Pfann, Trustee $______ 0 N/A $______
Robert A. Robinson, Trustee $______ 0 N/A $______
</TABLE>
*Represents the total compensation paid to such persons during the calendar year
ended December 31, 1998. In the case of Mr. Loos, the amount represents the
amount estimated to be paid to him for the current fiscal year.
**Wolfe J. Frankl resigned from his position of Trustee effective December 31,
1999.
Trustees of the Funds receive from the Funds an annual fee and a fee for
attending each meeting of the Trustees and each committee meeting and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
As of the date of this Statement of Additional Information the Trustees and
officers of the Funds as a group owned less than 1% of the outstanding shares of
the Trust.
Investment Adviser. The Funds retain HSBC Asset Management Americas Inc.
("Adviser") to act as the adviser for each Fund. The Adviser is the North
American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai
Banking Corporation) and HSBC Bank USA and is located at 140 Broadway, New York,
New York 10005.
The Advisory Contracts for the Funds provide that the Adviser will manage the
portfolio of each Fund and will furnish to each Fund investment guidance and
policy direction in connection therewith. The Adviser has agreed to provide to
the Trust, among other things, information relating to composition, credit
conditions and average maturity of the portfolio of each Fund. Pursuant to the
Advisory Contract, the Adviser also furnishes to the Trust's Board of Trustees
periodic reports on the investment performance of each Fund. The Adviser has
also agreed in the Advisory Contract to provide administrative assistance in
connection with the operation of each Fund. Administrative services provided by
the Adviser include, among other things, (i) data processing, clerical and
bookkeeping services required in connection with maintaining the financial
accounts and records for the Funds, (ii) compiling statistical and research data
required for the preparation of reports and statements which are periodically
distributed to the Funds' officers and Trustees, (iii) handling general
shareholder relations with Fund investors, such as advice as to the status of
their accounts, the current yield and dividends declared to date and assistance
with other questions related to their accounts, and (iv) compiling information
required in connection with the Funds' filings with the Securities and Exchange
Commission.
SUB-ADVISER
The Advisor retains Delaware International Advisers LTD. to act as sub-adviser
("the Sub-Adviser") to the International Fund. The Sub-Adviser's principal
offices are located at Third Floor, 80 Cheapside, London, England EC2V 6EE.
Delaware International is an indirect wholly-owned subsidiary of Delaware
Management Holdings, Inc., a Delaware corporation ("DMH"), with principal
offices at One Commerce Square, 2005 Market Street, Philadelphia, PA 19103. DMH
and its subsidiaries (collectively, "Delaware Investments") trace their origins
to an investment counseling firm founded in 1929. The Sub-Adviser was formed in
1990
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and provides investment advisory services primarily to institutional accounts
and mutual funds in the global and international equity and fixed income
markets. As of December 31, 1999, Delaware International managed approximately
$____ billion in global and foreign stock and bond portfolios for separate
account and investment company clients. As of that date, advisory affiliated
within Delaware Investments had total assets under management of approximately
$____ billion, including assets managed by Delaware International.
DMH is an indirect, wholly-owned subsidiary of Lincoln National Corporation
("Lincoln National"). Lincoln National, a publicly held company with
headquarters in Fort Wayne, Indiana is a financial services holding company.
Its wealth accumulation and protection businesses provide annuities, life
insurance, 401(k) plans, life-health reinsurance, institutional investment
management and mutual funds.
Pursuant to terms of its sub-advisory contract, Delaware International
commenced its sub-advisory services on October 1, 1998. Prior to that date,
HSBC Asset Management Europe, Ltd., HSBC Asset Management Hong Kong, Ltd., HSBC
Asset Management (Japan) KK, and HSBC Asset Management Singapore Ltd.,
affiliated of the Adviser, served as sub-advisers to the International
Fund.
Under its Sub-Advisory contract with the Adviser, Delaware International
provides at its own expense the personnel and equipment necessary to carry out
its duties. Delaware International will provide the Fund with quarterly reports
with respect to securities the Fund holds or markets in which the Fund has
invested.
BANKING LAWS
Counsel to the Trust and special counsel to the Adviser, have advised the
Adviser that the Adviser may perform the services for the Funds contemplated by
the Advisory Contract without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. Such counsel has pointed out, however,
that this question has not been authoritatively determined and that judicial or
administrative decisions or interpretations of present Federal or state statutes
and regulations relating to the permissible activities of banks or trust
companies and their subsidiaries or affiliates, as well as future changes in
Federal or state statutes and regulations and judicial or administrative
decisions or interpretations thereof, could prevent the Adviser from continuing
to perform such services for the Funds.
If the Adviser were prohibited from performing any of its services for the
Trust, it is expected that the Board of Trustees would recommend to the Funds'
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board.
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<PAGE>
ADMINISTRATOR. BISYS Fund Services, Limited Partnership d/b/a BISYS Fund
Services serves as Administrator of the Funds pursuant to the terms of a
Management and Administration Agreement (the "Administrative Services
Agreement"). Pursuant to the Administrative Services Agreement, BISYS Fund
Services: (i) provides administrative services reasonably necessary for the
operation of the Funds, (other than those services which are provided by the
Adviser pursuant to the Advisory Contract); (ii) provides the Funds with office
space and office facilities reasonably necessary for the operation of the Funds;
and (iii) employs or associates with itself such persons as it believes
appropriate to assist it in performing its obligations under the Administrative
Services Agreement.
As compensation for its administrative services under the Administrative
Services Agreement, BISYS Fund Services is paid a monthly fee at the following
annual rates: 0.15% of a Fund's first $200 million of average daily net assets;
0.125% of a Fund's second $200 million of average daily net assets; 0.10% of a
Fund's third $200 million of average daily net assets; and 0.08% of a Fund's
average daily net assets in excess of $600 million.
For the year ended December 31, 1999, BISYS Fund Services earned
administrative service fees totaling $______, $_______, $______ and $______ net
of fee waivers of $______, $______, $______ and $______ for the International
Equity Fund, Growth and Income Fund, Fixed Income Fund and the New York Fund
respectively.
For the year ended December 31, 1998, BISYS Fund Services earned
administration service fees totaling $98,265, $141,409, $52,902, and $84,516 net
of fee waivers of $94,246, $65,509, $35,257 and $56,326 for the International
Equity Fund, Growth and Income Fund, Fixed Income Fund and the New York Fund,
respectively.
For the year ended December 31, 1997, BISYS Fund Services earned
administration service fees totaling $46,781, $137,244, $64,477 and $39,320 net
of fee waivers of $22,123, $68,828, $32,336 and $19,719, for the International
Equity Fund, Growth and Income Fund, Fixed Income Fund and the New York Fund,
respectively.
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<PAGE>
DISTRIBUTOR. Shares of the Funds are offered on a continuous basis through
BISYS Fund Services, the Distributor, pursuant to the Distribution Contract.
The Distributor is not obligated to sell any specific amount of shares.
FEES AND EXPENSES
As compensation for its advisory and management services, the Adviser is paid
a monthly fee by each Fund at the following annual rates:
For the International Equity Fund, the Adviser is paid a monthly advisory fee
at an annual rate of 0.90% of the Fund's average daily net assets.
Portion of Average Daily Value of Net Assets of
the Growth and Income Fund and Fixed Income Fund Advisory
- ------------------------------------------------- ------------
Not exceeding $400 million...................... 0.550%
In excess of $400 million but
not exceeding $800 million.................... 0.505
In excess of $800 million but
not exceeding $1.2 billion.................... 0.460
In excess of $1.2 billion but
not exceeding $1.6 billion.................... 0.415
In excess of $1.6 billion but
not exceeding $2 billion...................... 0.370
In excess of $2 billion......................... 0.315
Portion of Average Daily Value of Net Assets of
the Mid Cap Fund Advisory
- ----------------------- ------------
Not exceeding $400 million...................... _____%
In excess of $400 million but
not exceeding $800 million.................... _____
In excess of $800 million but
not exceeding $1.2 billion.................... _____
In excess of $1.2 billion but
not exceeding $1.6 billion.................... _____
In excess of $1.6 billion but
not exceeding $2 billion...................... _____
In excess of $2 billion......................... _____
Portion of Average Daily Value of Net Assets of
the New York Tax-Free Fund Advisory
- - ------------------------------------------------ ------------
Not exceeding $300 million...................... 0.450%
In excess of $300 million but
not exceeding $600 million.................... 0.420
In excess of $600 million but
not exceeding $1 billion...................... 0.385
In excess of $1 billion but
not exceeding $1.5 billion.................... 0.350
In excess of $1.5 billion but
not exceeding $2 billion...................... 0.315
In excess of $2 billion......................... 0.280
With respect to the International Fund for the years ended December 31, 1999,
1998, and 1997, the Adviser earned $_______, $336,751 and $89,584 net of fee
waivers of $_______, $336,751 and $307,447, respectively.
With respect to the Growth and Income Fund for the years ended December 31,
1999, 1998, and 1997 the Adviser earned $_______$518,499 and $755,596
respectively, in advisory fees.
With respect to the Fixed Income Fund, for the years ended December 31, 1999,
1998, and 1997 the Adviser was paid $______$88,170 and $354,982.
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<PAGE>
With respect to the New York Fund, for the years ended December 31, 1999, 1998
and 1997, the Adviser was paid $_______, $309,890 and $98,398 net of fee
waivers of $__, $0 and $78,720 respectively.
Except for the expenses paid by the Adviser under the Advisory Contract and by
BISYS Fund Services, Inc. under the Management and Administration Agreement, the
Funds bear all costs of their operations. Expenses attributable to a Fund are
charged against the assets of the Fund.
The Advisory Contract, Distribution Contract and Management and Administration
Agreement (upon expiration of its initial term on September 1, 1999) will
continue in effect with respect to a Fund from year to year provided such
continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of such Fund or by the Trust's Trustees and (ii)
by a majority of the Trustees who are not parties to such contracts or
"interested persons" (as defined in the Investment Company Act of 1940) of any
such party ("non-interested Trustees"). Each contract may be terminated with
respect to a Fund at any time, without payment of any penalty, by a vote of a
majority of the outstanding voting securities of the Fund (as defined in the
Investment Company Act of 1940) or by a vote of a majority of the Trustees on 60
days' written notice, except in the case of the Management and Administration
Agreement which requires written notice of non-renewal given at least 90 days
prior to expiration of the then current term. The Advisory Contract,
Administrative Services Contract and the Distribution Contract shall terminate
automatically in the event of their assignment (as defined in the Investment
Company Act of 1940). The Board of Trustees of the Trust, including the non-
interested Trustees, approved the continuance of each Fund's Advisory Contract,
the Distribution Contract and the Co-Administration Agreement at a meeting of
the Board of Trustees on January 25, 2000.
DISTRIBUTION PLANS AND EXPENSES
The Board of Trustees of the Trust has adopted Distribution Plans (the "Plan")
on behalf of each class of shares of each Fund, except the Institutional class
of shares of the International Equity Fund, pursuant to Rule 12b-1 of the
Investment Company Act of 1940, after having concluded that there is a
reasonable likelihood that the Plan will benefit each Fund and its shareholders.
The Plan provides for a monthly payment not to exceed an annual rate of 0.35%
(0.50% in the case of the Growth and Income Fund) of the average daily net
assets of the Class A shares of all the Funds. Class B and Class C shares pay a
fee not to exceed an annual rate of 1.00% of the average daily net assets of
each share class of each Fund.
BISYS Fund Services will use all amounts received under the Plan for
payments to broker-dealers or financial institutions for their assistance in
distributing shares of each Fund including rendering distribution-related asset
introduction and asset retention services and otherwise promoting the sale of
the Funds' shares. BISYS Fund Services may also use all or any portions of such
fee to pay expenses such as the printing and distribution of prospectuses sent
to prospective investors, the preparation, printing and distribution of sales
literature and expenses associated with media advertisements and telephone
services.
The Plan provides for BISYS Fund Services to prepare and submit to the Board
of Trustees on a quarterly basis written reports of all amounts expended
pursuant to the Plan and the purpose for which such expenditures were made. The
Plans may not be amended to increase materially the amount spent for
distribution expenses without approval by a majority of the outstanding shares
of each class and approval of a majority of the non-interested Trustees.
Distribution expenses incurred in one year will not be carried forward into and
reimbursed in the next year for actual expenses incurred in the previous year.
The Plan will continue in effect with respect to each Fund from year to year
provided such continuance is approved annually by a vote of the Board of
Trustees of the Trust and of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the operation of
54
<PAGE>
the Plan or in any agreements related to the Plan, cast in person at a meeting
called for the purpose of voting on such Plan ("12b-1 non-interested Trustees").
The Board of Trustees of the Trust, including the 12b-1 non-interested Trustees,
approved the continuance of the Plan at a meeting of the Board of Trustees on
January 25, 2000.
For the fiscal year ended December 31, 1999, the Funds incurred the following
amounts in distribution-related fees under the Rule 12b-1 Distribution
Plan:
<TABLE>
<CAPTION>
Printing of
Compensation to Prospectuses and Retail Postage and
Broker- Shareholder Marketing Miscellaneous
Fund Dealers Advertising Reports Program Expenses Total
---- ------- ----------- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
International Fund 0 0 0 0 0 0
(Service Class)
Fixed Income Fund 0 0 0 0 0 0
New York Fund $________ $ 0 $ 0 $ 0 $ 0 $______
</TABLE>
SERVICE ORGANIZATIONS
The Trust also contracts with banks (including HSBC Bank USA), trust
companies, broker-dealers or other financial organizations ("Service
Organizations") on behalf of the Funds to provide certain administrative
services for the Fund at a fee of up to an annual rate of 0.35% for Class A
shares and 0.50% for Class B and Class C shares. Services provided by Service
Organizations may include among other things; providing necessary personnel and
facilities to establish and maintain certain shareholder accounts and records;
assisting in processing purchase and redemption transactions; arranging for the
wiring of funds; transmitting and receiving of funds in connection with
shareholder orders to purchase or redeem shares; verifying and guaranteeing
client signatures in connection with redemption orders, transfers among and
changes in shareholders designating accounts; providing periodic statements
showing a shareholder's account balance and, to the extent practicable,
integrating such information with other client transactions; furnishing periodic
and annual statements and confirmations of all purchases and redemptions of
shares in a shareholder's account; transmitting proxy statements, annual
reports, and updating prospectuses and other communications from a Fund to its
shareholders; and providing such other services as each Fund or shareholder
reasonably may request, to the extent permitted by applicable statute, rule or
regulation.
55
<PAGE>
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than the minimum
initial or subsequent investments specified by each Fund or charging a direct
fee for servicing. If imposed, these fees would be in addition to any amounts
which might be paid to the Service Organization by a Fund. Each Service
Organization has agreed to transmit to its clients a schedule of any such fees.
Shareholders using Service Organizations are urged to consult them regarding any
such fees or conditions.
Any customer of a Participating Organization may become the shareholder of
record upon written request to its Participating Organization or the Fund's
Transfer Agent. Each Participating Organization will receive monthly payments
which in some cases may be based upon expenses that the Participating
Organization has incurred in the performance of its services under the Servicing
Agreement. The payments will not exceed, on an annualized basis, an amount equal
to 0.35% (0.50% for Class B and Class C) of the average daily value during the
month of Fund shares in the subaccount of which the Participating Organization
is record owner as nominee for its customers. Such payments will be separately
negotiated with each Participating Organization and will vary depending upon
such factors as the services provided and the costs incurred by each
Participating Organization. The payment may be more or less than the fees
payable to BISYS Fund Services, Inc. for the services it provides pursuant to
the Transfer Agency Agreement for similar services.
The payments will be made by the Funds to the Participating Organizations
pursuant to the Servicing Agreements. BISYS Fund Services, Inc. will not
receive any compensation as transfer or dividend disbursing agent with respect
to the subaccounts maintained by Participating Organizations. The Board of
Trustees will review, at least quarterly, the amounts paid and the purposes for
which such expenditures were made pursuant to the Servicing Agreements.
Under separate agreements, the Adviser (not the funds) may make supplementary
payments from its own revenues to a Participating Organization that agrees to
perform services such as advising customers about the status of their
subaccounts, the current yield and dividends declared to date and providing
related services a shareholder may request. Such payments will vary depending
upon such factors as the services provided and the cost incurred by each
Participating Organization.
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<PAGE>
CALCULATION OF YIELDS AND
PERFORMANCE INFORMATION
From time to time, the Funds quote current yield based on a specific thirty
day period. Such thirty day yield, which may be used in advertisements and
marketing material, is calculated by using a method known as "semi-annual
compounding." Yield is calculated by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
Where: yield = 2[(a-b + 1)/6/ -1]
cd
a = dividends and interest earned during the period, including
the amortization of market premium or accretion of market
discount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The current yields for the Fixed Income and New York Funds as of December 31,
1999, were ____% and ____%, respectively (excluding the maximum sales of 4.75%
for each Fund). The current yields as of the same date including the maximum
sales charge were ____% and ____%, respectively, for the Fixed Income and New
York Funds.
The Funds from time to time may advertise total return and cumulative total
return figures. Total return is the average annual compound rate of return for
the periods of one year and the life of each Fund, where applicable, each ended
on the last day of a recent calendar quarter. Total return quotations reflect
the change in the price of each Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
shares of each Fund. Total return is calculated by finding the average annual
compound rates of return of a hypothetical investment over such periods, that
would compare the initial amount to the ending redeemable value of such
investment according to the following formula (total return is then expressed as
a percentage):
Where: P(1+T)/n/ = ERV
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 investment
made at the beginning of the applicable period.
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<PAGE>
The average annual total return information for Class A shares of each of the
Funds, and the Institutional Class of the International Fund, for the periods
indicated below is as follows:
<TABLE>
<CAPTION>
Shares Charge* NAV
---------------- -------
<S> <C> <C>
Growth and Income Fund
One year ended December 31, 1999 _____% _____%
Five years ended December 31, 1999 _____% _____%
Inception (June 6, 1986) to December 31, 1999 _____% _____%
International Equity Fund
Institutional Class
One year ended December 31, 1999 N/A _____%
Inception (March 1, 1995) to December 31, 1999 N/A _____%
Class A
One year ended December 31, 1999 _____% _____%
Inception (April 25, 1994) to December 31, 1999 _____% _____%
Fixed Income Fund
One Year Ended December 31, 1999 _____% ____%
Inception (January 15, 1993) to December 31, 1999 _____% ____%
New York Tax-Free Bond Fund
One Year Ended December 31, 1999 _____% ____%
Five Years Ended December 31, 1999 _____% ____%
Inception (March 21, 1989) to December 31, 1999 _____% ____%
</TABLE>
* Includes maximum sales charge. Performance data for Class B and Class C shares
is not yet available because these classes of shares were not offered prior to
May, 1999. Past Performance is not predictive of future performance.
Cumulative total return is the rate of return on a hypothetical initial
investment of $1,000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. Cumulative total return is calculated by finding the rate
of return of a hypothetical investment over such period, according to the
following formula (cumulative total return is then expressed as a percentage):
58
<PAGE>
C = (ERV/P) - 1
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
All Funds
From time to time, in marketing pieces and other Fund literature, each Fund's
or the Funds' total performance may be compared to the performance of broad
groups of comparable funds or unmanaged indices of comparable securities.
Evaluations of Fund performance made by independent sources may also be used in
advertisements concerning the Funds. Sources for Fund performance information
may include, but are not limited to, the following:
* Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
* Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Financial Times, Europe's business newspaper, which features from time to
time articles on international or country-specific funds.
* Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
* Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
59
<PAGE>
Personal Investor, a monthly investment advisory publication that includes
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Sylvia Porter's Personal Finance, a monthly magazine focusing on personal
money management that periodically rates and ranks mutual funds by
performance.
* Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
* Wiesenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
* Sources of Fund performance information actually used by the Funds in the
past.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value per share for the purpose of pricing and
redemption orders is determined at 4:15 p.m. (Eastern time) on each day the
Funds' transfer agent is open for business. The net asset value will not be
computed on the following holidays: New Year's Day, Martin Luther King Jr.'s
Day, Presidents' Day, Good Friday Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day and Christmas. The net asset value
per share of each Fund is computed by dividing the total current market value of
the net assets of a Fund, (i.e., the value of the assets less the liabilities),
by the total number of shares outstanding at the time of determination. All
expenses, including the advisory and administrative fees, are accrued daily and
taken into account for the purpose of determining the net asset value. The
public offering price (net asset value of $_____ and $_____ for the
International Fund and Growth and Income Fund, plus maximum sales charge of
5.00% of the offering price) per share at December 31, 1999 was $_____ and
$_____ respectively. The public offering price (net asset value of $_____, and
$_____ plus maximum sales charge of 4.75% of the offering price for the Fixed
Income Fund and New York Fund, respectively) per share at December 31, 1999 was
$_____ and $_____ for the Fixed Income Fund and New York Fund, respectively.
Portfolio securities are valued at the last quoted sales price as of the close
of business on the day the valuation is made, or lacking any sales, at the mean
between closing bid and asked prices. Price information on listed securities is
taken from the exchange where the security is primarily traded. The value for
each unlisted security is on a day such security is not traded shall be based on
the mean of the bid and ask quotations for that day. The value for each
unlisted security is based on the last trade price for that security on a day in
which the security is traded. The value of each security for which readily
available market quotations exist will be based on a decision as to the broadest
and most representative market for such security. Options on stock indices
traded on national securities exchanges are valued at the close of options
trading on such exchanges (which is currently 4:10 p.m., Eastern time). Stock
index futures and related options, which are traded on commodities exchanges,
are valued at their last sale price as of the close of such exchanges (which is
currently 4:15 p.m., Eastern time). Other assets and securities for which no
quotations are readily available (and in the case of the
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<PAGE>
International Fund, securities for which market quotations are available but the
Adviser determines that a given quotation is not representative of a security's
current market value) are valued at fair value as determined in good faith by
the Trustees. Securities may be valued on the basis of prices provided by a
pricing service when such prices are believed to reflect the fair market value
of such securities. Short-term investments are valued at amortized cost, which
approximates market value. The Board of Trustees has determined in good faith
that amortized cost approximates fair market value. All assets and liabilities
initially expressed in foreign currencies will be translated into U.S. Dollars
at the bid price of such currencies against U.S. Dollars last quoted by a major
bank or broker. If such quotations are not available as of the close of the New
York Stock Exchange, the rate of exchange will be determined in accordance with
policies established in good faith by the Board of Trustees.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policy
established by the Trustees, the Adviser (or Sub-Adviser, as appropriate) is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Funds to obtain the
best results taking into account the dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities involved. Brokerage may be allocated
to the Distributor to the extent and in the manner permitted by applicable law,
provided that in the judgment of the investment adviser the use of the
Distributor is likely to result in an execution at least as favorable as that of
other qualified brokers. While the Adviser generally seeks reasonably
competitive spreads or commissions, the Funds will not necessarily be paying the
lowest spread or commission available.
Investment decisions for a Fund concerning specific portfolio securities are
made independently from those for other clients advised by its Adviser. Such
other investment clients may invest in the same securities as a Fund. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which the Adviser
believes to be equitable to each client, including the Fund. In some instances,
this investment procedure may adversely affect the price paid or received by a
Fund or the size of the position obtained or sold for a Fund. To the extent
permitted by law, the Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for such other
investment clients in order to obtain best execution.
Purchases and sales of securities will often be principal transactions in the
case of debt securities and, for the Fixed Income Fund, equity securities traded
otherwise than on an exchange. The purchase or sale of equity securities will
frequently involve the payment of a commission to a broker-dealer who effects
the transaction on behalf of the Fund. Debt securities normally will be
purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price. Generally, money market securities
are traded on a net basis and do not involve brokerage commissions. Under the
1940 Act, persons affiliated with HSBC Bank, the Adviser, the Funds or
BISYS Fund Services are prohibited from dealing with the Funds as a principal in
the purchase and sale of securities except in accordance with regulations
adopted by the Securities and Exchange Commission. The Funds may purchase
Municipal Obligations from underwriting syndicates of which the Distributor or
other affiliate is a member under certain conditions in accordance with the
provisions of a rule adopted under the 1940 Act. Under the 1940 Act, persons
affiliated with the Adviser, the Funds or BISYS Fund Services may act as a
broker for the Funds. In order for such persons to effect any portfolio
transactions for the Funds, the commissions, fees or other remuneration received
by such persons must be reasonable and fair compared to the commissions, fees or
other remunerations paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable
61
<PAGE>
period of time. This standard would allow the affiliate to receive no more than
the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arms-length transaction. The Trustees of the Trust
regularly review the commissions paid by the Funds to affiliated brokers. The
Funds will not do business with nor pay commissions to affiliates of the Adviser
in any portfolio transactions where they act as principal.
As permitted by Section 28(e) of the "Securities Exchange Act of 1934 (the
"1934 Act") the Adviser may cause the Funds to pay a broker-dealer which
provides "brokerage and research services" (as defined in the 1934 Act) to the
Adviser an amount of disclosed commission for effecting a securities transaction
for the Funds in excess of the commission which another broker-dealer would have
charged for effecting that transaction.
The Adviser may, in circumstances in which two or more dealers are in a
position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to the Adviser. By allocating
transactions in this manner, the Adviser is able to supplement its research and
analysis with the view and information of securities firms.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds. The Adviser
may cause a Fund to pay commissions higher than another broker-dealer would have
charged if the Adviser believes the commission paid is reasonable in relation to
the value of the research services incurred by the Adviser.
The aggregate brokerage commissions paid by the International Fund for the
years ended December 31, 1999, 1998 and 1997 were $____, $302,412, $330,959
respectively. No brokerage commissions were paid to affiliated brokers during
these periods.
For the years ended December 31, 1999, 1998, and 1997 the Growth and Income
Fund paid an aggregate of $____, $167,379 and $288,300 respectively, in
brokerage commissions.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate measures the frequency with which a Fund's
portfolio of securities is traded. The Funds will attempt to purchase securities
with intent of holding them for investment but may purchase and sell portfolio
securities whenever the Adviser believes it to be warranted (e.g., the Fund may
sell portfolio securities in anticipation of an adverse market movement). The
purchase and sale of portfolio securities may involve dealer mark-ups,
underwriting commissions or other transaction costs. Generally, the higher the
portfolio turnover rate, the higher the transaction costs to the Fund, which
will generally increase the Fund's total operating expenses. In addition,
increased portfolio turnover may increase the likelihood of additional capital
gains for each Fund. The International Fund's portfolio turnover rate for the
years ended December 31, 1999, December 31, 1998 and December 31, 1997 was
163.90%, and 112.54% respectively. The Growth and Income Fund's portfolio
turnover rate for the years ended December 31, 1999, December 31, 1998 and
December 31, 1997 was ____% 82.19% and 69.1% respectively. The Fixed Income
Fund's portfolio turnover rate for the years ended December 31, 1999, December
31, 1998 and 1997 was 71.05% and 61% respectively. The New York Fund's
portfolio turnover rate for the years ended December 31, 1999, December 31, 1998
and 1997 was 56.81% and 35.6% respectively.
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<PAGE>
EXCHANGE PRIVILEGE
Shareholders who have held all or part of their shares in a Fund for at least
seven days may exchange those shares for shares of the other portfolios of the
Trust and the HSBC Funds Trust which are available for sale in their state. A
shareholder who has paid a sales load in connection with the purchase of shares
of any of the Funds will not be subject to any additional sales loads in the
event such shareholder exchanges shares of one Fund for shares of another Fund.
Shareholders of any of the HSBC Money Market Funds who exchange shares of any of
such Money Market Funds for shares of any of the Funds are charged the sales
loads applicable to the Funds as stated in the Prospectus.
Before effecting an exchange, shareholders should review the prospectuses.
Exercise of the exchange privilege is treated as a redemption for Federal and
New York State and City income tax purposes and, depending on the circumstances,
a gain or loss may be recognized. See the Prospectus discussion of the Federal
tax treatment of load reductions or eliminations in an exchange.
The exchange privilege may be modified or terminated upon sixty (60) days'
notice to shareholders. Although initially there will be no limit on the number
of times a shareholder may exercise the exchange privilege, the Funds reserve
the right to impose such a limitation. Call or write the Funds for further
details.
PURCHASE OF SHARES
The following information supplements and should be read in conjunction with
the sections in the Funds' Prospectus entitled "Purchasing and Adding to Your
Shares." The Prospectus contains a general description of how investors may buy
shares of the Funds and states whether the Funds offer more than one class of
shares. Class A shares are generally sold with a sales charge payable at the
time of purchase. The prospectus contains a table of applicable sales charges.
Certain purchases of Class A shares may be exempt from a sales charge. Class B
and C shares may be subject to a contingent deferred sales charge ("CDSC")
payable upon redemption within a specified period after purchase. The prospectus
contains a table of applicable CDSCs. After being held for six years, Class B
shares will automatically convert into Class A shares which are not subject to
sales charges or a CDSC. Class B and C shares are offered without an initial
sales charge. The Funds may sell shares without a sales charge or CDSC pursuant
to special purchase plans the Trust signs.
When purchasing Fund shares, you must specify which Class is being purchased.
The decision as to which Class of shares is most beneficial to you depends on
the amount and the intended length of your investment. You should consider
whether, during the anticipated life of your investment in the Fund, the
accumulated distribution fee, service fee and CDSC, if any, on Class B shares or
Class C shares would be less than the accumulated distribution fee and initial
sales charge on Class A shares purchased at the same time, and to what extent,
if any, such differential would be offset by the return on Class A shares
respectively. Additionally, investors qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
might consider purchasing Class A shares because the accumulated continuing
distribution and service fees on Class B or Class C shares exceed the
accumulated distribution fee and initial sales charge on Class A shares during
the life of the investment. Finally, you should consider the effect of the CDSC
period and any conversion rights of the Classes in the context of your own
investment time frame. For example, while Class C shares have a shorter CDSC
period than Class B shares, Class C shares do not have a conversion feature and,
therefore, are subject to ongoing distribution and service fees. Thus, Class B
shares may be more attractive than Class C shares to investors with longer term
investment outlooks. Generally, Class A shares will be most appropriate for
investors who invest $1,000,000 or more in Fund shares, and Class A shares will
not be appropriate for investors who invest less than $50,000 in Fund
shares.
A broker-dealer may receive different levels of compensation depending on
which class of shares is sold. The Distributor may also provide different
additional compensation to dealers in connection with selling shares of the
Funds or for their own company-sponsored sales programs. Additional
compensation or assistance may be provided to dealers and includes, but is not
limited to, payment or reimbursement for educational, training and sales
conferences or programs for their employees. In some cases, this compensation
may only be available to dealers whose representatives have sold or are expected
to sell significant amounts of shares. The Distributor will make these payments
from its own resources and none of the aforementioned additional compensation is
paid for by the applicable Fund or its shareholders.
Shares of the Funds are offered on a continuous basis at net asset value, plus
any applicable sales charge, by the Distributor as an investment vehicle for
institutions, corporations, fiduciaries and individuals.
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The sales charge applicable to the purchase of Fund shares will be waived on
the following purchases: (1) by Trustees and officers of the Trust and of HSBC
Funds Trust, and members of their immediate families (parents, spouses,
children, brothers and sisters), (2) by directors, employees and retirees of
Marine Midland Bank and its affiliates, and members of their immediate families,
(3) by financial institutions or corporations on behalf of their customers or
employees, or on behalf of any trust, pension, profit-sharing or other benefit
plan for such customers or employees, (4) by directors and employees of the
Distributor, selected broker-dealers and affiliates and members of their
immediate families, (5) by charitable organizations as defined in Section
501(c)(3) of the Internal Revenue Code ("Charitable Organizations") or for
charitable remainder trusts or life income pools established for the benefit of
Charitable Organizations, (6) by registered representatives of selling brokers
and members of their immediate families, (7) by individuals who have terminated
their Employee Benefit Trust ("EBT") Plan or have retired and are purchasing
shares in the Fund with the proceeds of their benefits checks (the EBT Plan must
currently own shares of a Fund at the time of the individual's purchase), (8) by
corporations, their officers or directors, partnerships, and their partners
which are customers or prospective customers of Marine Midland Bank when
authorized by an officer of Marine Midland Bank, and (9) by individuals who, as
determined by an officer of the Fund in accordance with guidelines established
by the Fund's Trustees, have purchased shares under special circumstances not
involving sales expenses to dealers or the Distributor. Eligible investors
should contact the Adviser for details.
The sales load does not apply in any instance to reinvested dividends.
From time to time dealers who receive dealer discounts and broker commissions
from the Distributor may reallow all or a portion of such dealer discounts and
broker commissions to other dealers or brokers. The Distributor, at its expense,
may also provide additional compensation to dealers in connection with sales of
shares of the Funds. Such compensation may include financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Trust, and/or other dealer- sponsored special events. In some
instances, this compensation may be made available only to certain dealers whose
representatives have sold a significant number of such shares. Compensation will
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation may also include the following types of non-cash compensation
offered through sales contests: (1) vacation trips, including the provision of
travel arrangements and lodging at luxury resorts at an exotic location, (2)
tickets for entertainment events (such as concerts, cruises and sporting events)
and (3) merchandise (such as clothing, trophies, clocks and pens). Dealers may
not use sales of a Fund's Shares to qualify for the compensation to the extent
such may be prohibited by the laws of any state or any self- regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by any Fund or its shareholders.
Stock certificates will not be issued with respect to the shares. The Transfer
Agent shall keep accounts upon the book of the Trust for recordholders of such
shares.
RIGHT OF ACCUMULATION
The Funds offer to all shareholders a right of accumulation under which any
shareholder may purchase shares of a Fund at the offering price applicable to
the total of (a) the dollar amount then being purchased plus (b) an amount equal
to the offering price of the shareholder's combined holdings of the shares of
the Fund. For the right of accumulation to be exercised, a shareholder must
provide at the time of purchase confirmation of the total number of shares of
the Fund owned by such shareholder. Acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time on sixty days notice to shareholders. Shares held in the name of a
nominee or custodian under pension, profit- sharing, or other employee benefit
plans may not be
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combined with other shares held in the name of such nominee or custodian for
other plans to qualify for the right of accumulation.
LETTER OF INTENT
By initially investing at least $1,000 and submitting a Letter of Intent to
the transfer agent, a "single purchaser" may purchase shares of a Fund and other
eligible HSBC Funds (other than Money Market Funds) during a 13-month period at
the reduced sales charge rates applying to the aggregate amount of the intended
purchases stated in the Letter of Intent. The Letter of Intent may apply to
purchases made up to 90 days before the date of submission of the Letter.
Dividends and distributions of capital gains paid in shares of a Fund at net
asset value will not apply towards the completion of the Letter of Intent. The
Letter of Intent does not obligate a shareholder to buy the amount indicated in
the Letter of Intent; however, if the intended purchases are not completed
during the Letter of Intent period, the shareholder will be obligated to pay the
Distributor an amount equal to the difference between the regular sales charge
applicable to a single purchase of the number of shares purchased and the sales
charge actually paid. For further details, including escrow provisions, see the
Letter of Intent. Each Fund reserves the right to amend, suspend or cease
offering this program at any time.
REDEMPTIONS
The proceeds of a redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for Federal and New York
State and City income tax purposes. Any loss realized on the redemption of Fund
shares held, or treated as held, for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain dividends
received on the redeemed shares.
A shareholder's account with a Fund remains open for at least one year
following complete redemption and all costs during the period will be borne by
the Fund. This permits an investor to resume investments in such Fund during
the period in an amount of $50 or more.
To be in a position to eliminate excessive shareholder expense burdens, each
Fund reserves the right to adopt a policy pursuant to which it may redeem, upon
not less than 30 days' notice, shares of the Fund in an account which has a
value below a designated amount. However, any shareholder affected by the
exercise of this right will be allowed to make additional investments prior to
the date fixed for redemption to avoid liquidation of the account.
The Funds may suspend the right of redemption during any period when (i)
trading on the New York Stock Exchange is restricted or that Exchange is closed,
other than customary weekend and holiday closings, (ii) the Securities and
Exchange Commission has by order permitted such suspension or (iii) an emergency
exists making disposal of portfolio securities or determination of the value of
the net assets of the Funds not reasonably practicable.
Although it would not normally do so, the Trust has the right to pay the
redemption price in whole or in part in securities of a Fund's portfolio as
prescribed by the Trustees. When a shareholder sells portfolio securities
received in this fashion he would incur a brokerage charge. The Trust has,
however, elected to be governed by Rule 18f-1 under the 1940 Act, as amended.
Under that rule, the Trust must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of a Fund's net asset value at the beginning
of such period.
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SYSTEMATIC WITHDRAWAL PLAN
An owner of $10,000 or more worth of shares of a Fund may elect to have
periodic redemptions from his account to be paid on a monthly basis. The minimum
periodic payment is $50. A sufficient number of shares to make the scheduled
redemption will be redeemed on the first or the fifteenth day of the month.
Redemptions for the purpose of making such payments may reduce or even exhaust
the account if your monthly checks exceed the dividend, interest and capital
appreciation, if any, on your shares. A shareholder may request that these
payments be sent to a predesignated bank or other designated party. Shareholders
holding share certificates are not eligible to establish a Systematic Withdrawal
Plan because share certificates must accompany all withdrawal requests.
Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a
return on your investment. Payments to you pursuant to the Systematic Withdrawal
Plan are derived from the redemption of shares in your account and is a taxable
transaction on which gain or loss may be recognized for Federal, state and local
income tax purposes.
REINSTATEMENT PRIVILEGE
A shareholder in a Fund who has redeemed shares may reinvest, without a sales
charge, up to the full amount of such redemption at the net asset value
determined at the time of the reinvestment within 60 days of the original
redemption. This privilege must be effected within 60 days of the redemption and
the investor at the time of purchase must provide the number of shares redeemed
within the 60 day period. The shareholder must reinvest in the same Fund and
account from which the shares were redeemed. A redemption is a taxable
transaction and gain or loss may be recognized for Federal income tax purposes
even if the reinstatement privilege is exercised. Any loss realized upon the
redemption will not be recognized as to the number of shares acquired by
reinstatement, except through an adjustment in the tax basis of the shares so
acquired.
INCOME TAXES
The Funds intend to distribute annually substantially all of their net
investment income in the form of dividends. Shares purchased will begin earning
dividends on the day of settlement and shares redeemed will earn dividends
through the date of redemption. Net investment income for a Saturday, Sunday or
holiday will be declared as a dividend on the previous business day. Dividends
declared in, and attributable to, the preceding month will be paid within five
business days after the end of such month.
In order to satisfy certain annual distribution requirements of the Internal
Revenue Code of 1986 (the "Code"), the Funds may declare special dividend and
capital gains distributions during October, November or December as of a record
date in such a month. Such distributions, if paid to shareholders in the
following January, are deemed for Federal income tax purposes to have been paid
by the Fund and received by shareholders on December 31 of the prior year.
Each Fund will be treated as a separate entity for Federal income tax
purposes, notwithstanding that it is one of multiple series of the Trust. Each
Fund has elected to be treated, and has qualified and intends to continue to
qualify to be treated as a regulated investment company for each taxable year by
complying with the provisions of the Code applicable to regulated investment
companies so that it will not be liable for Federal income tax with respect to
its net investment income and net realized capital gains distributed to
shareholders in accordance with the timing requirements of the Code.
In order to qualify as a regulated investment company for a taxable year, each
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to
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loans of stock or securities and gains from the sale or other disposition of
stock or securities or foreign currency gains related to investments in stock or
securities or other income (including gains from options, futures or forward
contracts) derived with respect to the business of investing in stock,
securities or currency; (b) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the market value of a Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other stocks and
securities limited, in the case of other stocks or securities for purposes of
this calculation, in respect of any one issuer, to an amount not greater than 5%
of its assets or 10% of the voting stocks or securities of the issuer, and (ii)
not more than 25% of the value of its assets is invested in the stocks or
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
Federal income tax on taxable income (including realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
The amount of capital gains, if any, realized in any given year will result
from sales of securities made with a view to the maintenance of a portfolio
believed by each Fund's management to be most likely to attain such Fund's
investment objective. Such sales and any resulting gains or losses, may
therefore vary considerably from year to year. Since at the time of an
investor's purchase of shares, a portion of the per share net asset value by
which the purchase price is determined may be represented by realized or
unrealized appreciation in each Fund's portfolio or undistributed income of such
Fund, subsequent distributions (or portions thereof) on such shares may be
taxable to such investor even if the net asset value of his shares is, as a
result of the distributions, reduced below his cost for such shares and the
distributions (or portions thereof) represent a return of a portion of his
investment.
Each Fund is required to report to the Internal Revenue Service (the "IRS")
all distributions of taxable dividends and of capital gains, as well as the
gross proceeds of share redemptions. Each Fund may be required to withhold
Federal income tax at a rate of 31% ("backup withholding") from taxable
dividends (including capital gain dividends) and the proceeds of redemptions of
shares paid to non-corporate shareholders who have not furnished such Fund with
a correct taxpayer identification number and made certain required
certifications or who have been notified by the IRS that they are subject to
backup withholding. In addition, a Fund may be required to withhold Federal
income tax at a rate of 31% if it is notified by the IRS or a broker that the
taxpayer identification number is incorrect or that backup withholding applies
because of under reporting of interest or dividend income.
Distributions of taxable net investment income and net realized capital gains
will be taxable as described in the Prospectus whether made in shares or in
cash. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from prior years will be applied against capital
gains. Shareholders receiving distributions in the form of additional shares
will have a cost basis for Federal income tax purposes in each share so received
equal to the net asset value of a share of the Fund on the reinvestment date.
Fund distributions will also be included in individual and corporate
shareholders' income on which the alternative minimum tax may be imposed.
Any loss realized upon the redemption of shares held (or treated as held) for
six months or less will be treated as a long-term capital loss to the extent of
any long-term capital gain dividend received on the redeemed shares. Any loss
realized upon the redemption of shares within six months after receipt of an
exempt-interest dividend will be disallowed. All or a portion of a loss
realized upon the redemption of shares may be disallowed to the extent shares
are purchased (including shares acquired by means of reinvested dividends)
within 30 days before or after such redemption. Exchanges are treated as
redemptions for Federal tax purposes.
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Different tax treatment is accorded to accounts maintained as IRAs, including
a penalty on early distributions. Shareholders should consult their tax advisers
for more information.
Current federal income tax law requires that a holder of a zero coupon
security report as income each year the portion of the original issue discount
on such security that accrues that year, even though the holder receives no cash
payments of interest during the year.
The "straddle" rules of Section 1092 of the Code may require the Funds which
are permitted to engage in such transactions to defer the recognition of certain
losses incurred on its transactions involving certain stock or securities,
futures contracts or options. Section 1092 defines a "straddle" to include
"offsetting positions" with respect to publicly traded stock or securities. A
"position" is defined to include a futures contract and an option. In general,
the Funds will be considered to hold offsetting positions if there is a
substantial diminution of its risk of loss from holding one position by reason
of its holding one or more other positions. Section 1092 generally provides
that in the case of a straddle, any loss from the disposition of a position (the
"loss position") in the straddle shall be recognized for any taxable year only
to the extent that the amount of such loss exceeds the unrealized gains on any
offsetting straddle position (the "gain position") and the unrealized gain on
any successor position (which is a position that is itself offsetting to the
gain position and is acquired during a period commencing 30 days prior to, and
ending 30 days after, the disposition of the loss position).
These special tax rules applicable to options and futures transactions could
affect the amount, timing and character of capital gain distributions to
shareholders by causing holding period adjustments, converting short-term
capital losses into long-term capital losses, and accelerating a Fund's income
or deferring its losses.
For purposes of the dividends-received deduction available to corporations,
dividends received by a Fund from taxable domestic corporations in respect of
any share of stock treated as debt-financed under the Code or held by the Fund
for 45 days or less (90 days in the case of certain preferred stock) will not be
treated as qualifying dividends. To the extent applicable, for purposes of the
dividends-received deduction the holding period of any share of stock will not
include any period during which the Fund has an option or a contractual
obligation to sell, or has granted certain call options with respect to,
substantially identical stock or securities or, under Treasury regulations to be
promulgated, a Fund may diminish its risk of loss by holding one or more other
positions with respect to substantially similar or related property. It is
anticipated that these rules will operate so as to reduce the portion of
distribution paid by the Fund that will be eligible for the dividends received
deduction available to corporate shareholders of the Fund. The dividends-
received deduction is reduced to the extent the shares of the Funds with respect
to which the dividends are received are treated as debt-financed under the Code
and is eliminated if the shares are deemed to have been held for less than 46
days.
Corporate shareholders should also note that their basis in shares of the Fund
may be reduced by the untaxed portion (i.e., the portion qualifying for the
dividends-received deduction) of an "extraordinary dividend" if the shares have
not been held for at least two years prior to declaration of the dividend.
Extraordinary dividends are dividends paid during a prescribed period which
equal or exceed 10% of a corporate shareholder's basis in its Fund shares or
which satisfy an alternative test based on the fair market value of the shares.
To the extent dividend payments received by corporate shareholders of the Fund
constitute extraordinary dividends, such shareholders' basis in their Fund
shares will be reduced and any gain realized upon a subsequent disposition of
such shares will therefore be increased. The untaxed portion of dividends
received by such shareholders is also included in adjusted alternative minimum
taxable income in determining shareholders' liability under the alternative
minimum tax.
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Each Fund is subject to a 4% nondeductible excise tax to the extent that it
fails to distribute to its shareholders during each calendar year an amount
equal to at least the sum of (a) 98% of its taxable ordinary investment income
(excluding long-term and short-term capital gain income) for the calendar year;
plus (b) 98% of its capital gain net income for the one year period ending on
October 31 of such calendar year; plus (c) any ordinary investment income or
capital gain net income from the preceding calendar year which was neither
distributed to shareholders nor taxed to a Fund during such year. Each Fund
intends to distribute to shareholders each year an amount sufficient to avoid
the imposition of such excise tax.
The untaxed portion of dividends received by such shareholders is also
included in adjusted alternative minimum taxable income in determining
shareholders' liability under the alternative minimum tax.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have owed
upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
SPECIAL TAX CONSIDERATIONS FOR THE INTERNATIONAL EQUITY FUND. Certain foreign
governments levy withholding taxes against dividend and interest income.
Although in some countries a portion of these taxes are recoverable, the non-
recovered portion of federal withholding taxes will reduce the income received
from the companies comprising the Fund.
Foreign exchange gains and losses realized by a Fund in connection with
certain transactions involving foreign currency denominated debt securities or
payables or receivables denominated in a foreign currency are subject to Section
988 of the Code which causes such gains and losses to be treated as ordinary
income and losses rather than capital gains and losses and may affect the
amount, timing and character of distributions to shareholders.
If a Fund invests in certain "passive foreign investment companies" ("PFICs")
which do not distribute their income on a regular basis, it could be subject to
Federal income tax (and possibly additional interest charges) on a portion of
any "excess distribution" or gain from the disposition of such shares even if it
distributes such income to its shareholders. If the Fund elects to treat the
PFIC as a "qualified electing Fund" ("QEF") and the PFIC furnishes the Fund
certain financial information in the required form, the Fund would instead be
required to include in income each year a portion of the ordinary earnings and
net capital gains of the QEF, regardless of whether received, and such amounts
would be subject to the various distribution requirements described above.
It is expected that dividends and interest from non-U.S. sources received by a
Fund will be subject to non-U.S. withholding taxes. Such withholding taxes may
be reduced or eliminated under the terms of applicable United States income tax
treaties, and the Fund intends to undertake any procedural steps required to
claim the benefits of such treaties. With respect to any non-U.S. taxes
(including withholding taxes) actually paid by the Fund, if more than 50% in
value of the Fund's total assets at the close of any taxable year consists of
stocks or securities of any non-U.S. corporations, the Fund may elect to treat
any non-U.S. taxes paid by it as paid by its shareholders. If the Fund does not
make the election permitted under Section 853, any foreign taxes paid or accrued
will represent an expense to the Fund which will reduce its investment company
taxable income. Absent this election, shareholders will not be able to claim
either a credit or a deduction for their pro rata portion of such taxes paid by
the Fund, nor will shareholders be required to treat as part of the amounts
distributed to them their pro rata portion of such taxes paid.
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In the event a Fund makes the election described above to pass through non-
U.S. taxes to shareholders, shareholders will be required to include in income
(in addition to any distributions received) their proportionate portion of the
amount of non-U.S. taxes paid by the Fund and will be entitled to claim either a
credit or deduction for their portion of such taxes in computing their U.S.
Federal income tax liability. Availability of such a credit or deduction is
subject to certain limitations. Shareholders will be informed each year in which
the Fund makes the election regarding the amount and nature of foreign taxes to
be included in their income for U.S. Federal income tax purposes.
Each year each Fund will notify shareholders of the character of its dividends
and distributions for federal income tax purposes. Depending on the residence of
the shareholder for tax purposes, such dividends and distributions may also be
subject to state, local or foreign tax consequences of ownership of Fund shares
in their particular circumstances.
Exempt-interest dividends and other distributions paid by the New York Fund
are includable in the tax base for determining the taxibility of social security
or railroad retirement benefits.
Depending on the residence of the New York Fund's shareholders for tax
purposes, distributions may also be subject to state and local taxes.
Shareholders are required to report the amount of tax-exempt interest received
each year, including exempt-interest dividends, on their Federal tax returns.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership of the New York Fund shares in their
particular circumstances. Shareholders who are not United States persons should
also consult their tax advisers as to the potential application of foreign and
U.S. taxes, including a 30% U.S. withholding tax (or lower treaty rate) on
dividends representing ordinary income to them.
Special Tax Considerations for the New York Tax-Fee Fund. The New York Tax-
Free Fund also intends to qualify to pay "exempt-interest dividends" within the
meaning of the Code by holding at the end of each quarter of its taxable year at
least 50% of the value of its total assets in the form of Municipal Obligations.
Dividends derived from interest on Municipal Obligations that constitute exempt-
interest dividends will not be includable in gross income for Federal income tax
purposes and exempt-interest dividends derived from interest on New York
Municipal Obligations will not be includable in gross income for Federal income
tax purposes or subject to New York State or City personal income tax.
The Tax Reform Act of 1986 (the "Tax Act") and subsequent restrictive
legislation may significantly affect the supply and yields of Municipal
Obligations and New York Obligations. The Tax Act imposed new restrictions on
the issuance of Municipal Obligations and New York Obligations. As described in
the Prospectus, pursuant to the Tax Act, if the Fund invested in Municipal
Obligations and New York Municipal Obligations that are private activity bonds,
some portion of exempt-interest dividends paid by the Fund would be treated as
an item of tax preference for purposes of the Federal alternative minimum tax on
individuals and corporations. In addition, a portion of original issue discount
relating to stripped Municipal Obligations and their coupons may be treated as
taxable income under certain circumstances, as will income from repurchase
agreements and securities loans.
Exempt-interest dividends received by corporations which hold shares of the
Fund will be part of the "adjusted current earnings" of such corporations, and
will increase the "alternative minimum taxable income" of such corporations for
purposes of the alternative minimum tax on corporations.
Property and casualty insurance companies will be required to reduce their
deductions for "losses incurred" by a portion of the exempt-interest dividends
they receive for shares of the Fund. The portion
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of the income from the Fund derived from bonds with respect to which a holder is
a "substantial user" will not be tax-exempt in the hands of such user.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund may not be deductible in whole or in part for Federal
or New York State or City income tax purposes. Pursuant to Treasury
Regulations, the Internal Revenue Service may deem indebtedness to have been
incurred for the purpose of purchasing or carrying shares, even though the
borrowed funds may not be directly traceable to the purchase of shares.
The Fund will determine the portion of any distribution that will qualify as
an exempt-interest dividend based on the proportion of its gross income derived
from interest on Municipal Obligations over the course of the Fund's taxable
year. Therefore, the percentage of any particular distribution designated as an
exempt-interest dividend may be substantially different from the percentage of
the Fund's gross income derived from interest on Municipal Obligations for the
period covered by the distribution.
Opinions relating to the validity of Municipal Obligations (including New York
Municipal Obligations) and to the exclusion of interest thereon from Federal,
New York State and New York City gross income are rendered by bond counsel for
each issue at the time of issuance. Neither the Trust nor its investment
adviser will review the proceedings relating to the issuance of Municipal
Obligations or the basis for such opinions.
The Fund may obtain put rights with respect to certain of its Municipal
Obligations. The Internal Revenue Service has issued published and private
rulings concerning the treatment of such put transactions for Federal income tax
purposes. Since these rulings are ambiguous in certain respects, there can be
no assurance that the Fund will be treated as the owner of the Municipal
Obligations subject to the puts or that the interest on such obligations
received by the Fund will be exempt from Federal income tax (and New York State
and City personal income tax in the case of New York Municipal Obligations). If
the Fund is not treated as the owner of the Municipal Obligations subject to the
puts, distributions of income derived from such obligations will be taxed as
ordinary income. The Fund anticipates that, in any event, it will remain
qualified to pay exempt-interest dividends with respect to interest derived from
other obligations in its portfolio.
SHARES OF BENEFICIAL INTEREST
The authorized capital of the Trust consists of an unlimited number of shares
of beneficial interest having a par value of $0.001 per share. The Declaration
of Trust authorizes the Trustees to classify or reclassify any unissued shares
of beneficial interest. Pursuant to that authority, the Board of Trustees has
authorized the issuance of four series representing four portfolios of the
Trust. Each portfolio, except the International Fund, is comprised of three
different classes of shares - Class A, Class B and Class C shares. The
International Fund is comprised of four different classes of shares - Class A,
Class B, Class C and Institutional Class shares.
The Institutional Shares are available to customers of financial institutions
or corporations on behalf of their customers or employees, or on behalf of any
trust, pension, profit sharing or other benefit plan for such customers or
employees. All shares of the Trust issued and outstanding are fully paid and
non-assessable. The Trust is not required by law to hold annual shareholder
meetings and does not intend to hold such meetings; however, the Trustees are
required to call a meeting for the purpose of considering the removal of persons
serving as Trustee if requested to do so in writing by the holders of not less
than 10% of the outstanding shares of the Trust.
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All shares have equal voting rights and will be voted in the aggregate, and
not by portfolio, except where voting by portfolio is required by law or where
the matter involved affects only one portfolio or class. As used in the
Prospectus and in this SAI, the term "majority," when referring to the approvals
to be obtained from shareholders in connection with general matters affecting
all of the Funds (e.g., election of Trustees and ratification of independent
auditors), means the vote of a majority of each Fund's outstanding shares
represented at a meeting. The term "majority", when referring to the approvals
to be obtained from shareholders in connection with approval of the Advisory
Contract or changing the fundamental policies of a Fund, means the vote of the
lesser of (i) 67% of the shares of the Fund represented at a meeting if the
holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.
Vacancies on the Board of Trustees are filled by the Board of Trustees if
immediately after filling any such vacancy at least two-thirds of the Trustees
then holding office have been elected to such office by shareholders at an
annual or special meeting. In the event that at any time less than a majority
of Trustees holding office were elected by shareholders, the Board of Trustees
will cause to be held within 60 days a shareholders' meeting for the purpose of
electing trustees to fill any existing vacancies. Trustees are subject to
removal with cause by two-thirds of the remaining Trustees or by a vote of a
majority of the outstanding shares of the Trust. The Trustees are required to
promptly call a shareholders' meeting for voting on the question of removal of
any Trustee when requested to do so in writing by not less than 10% of the
outstanding shares of the Trust. In connection with the calling of such
shareholders' meetings, shareholders will be provided with communication
assistance.
Each share of a Fund represents an equal proportionate interest in the Fund
with each other share of such Fund and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Trustees. In the event of liquidation or
dissolution, shares of a Fund are entitled to receive the assets belonging to
the Fund which are available for distribution, and of any general assets not
belonging to such Fund which are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Funds.
Under Massachusetts law, it is possible that shareholders of a Massachusetts
business trust might, under certain circumstances, be held personally liable for
acts or obligations of the Trust. The Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all loss and expense of any shareholder held personally
liable by reason of being or having been a shareholder of the Trust. Thus, the
risk that a shareholder of any Fund could incur financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund itself would be unable to
meet its obligations.
As of , 2000 no person owned of record or, to the knowledge of management
beneficially owned more than 5% of the outstanding shares of any Fund except as
set forth below:
Shares Held & Percent of Class
Name and Address of Shares Held Percent of Class
72
<PAGE>
<TABLE>
<CAPTION>
Holder of Record
------------------------------- --------------------------------------
<S> <C> <C>
</TABLE>
HSBC Bank USA informed the Trust that it was not the beneficial owner of any
of the shares it held of record.
73
<PAGE>
CUSTODIAN, TRANSFER AGENT
AND FUND ACCOUNTING AGENT
The Bank of New York has been retained, pursuant to a Custodian Agreement, to
act as custodian for each Fund. The Bank of New York's address is 90 Washington
Street, New York, New York 10286. Under the Custodian Agreement, the Custodian
maintains a custody account or accounts in the name of each Fund; receives and
delivers all assets for each such Fund upon purchase and upon sale or maturity;
collects and receives all income and other payments and distributions on account
of the assets of each such Fund; pays all expenses of each such Fund; receives
and pays out cash for purchases and redemptions of shares of each such Fund and
pays out cash if requested for dividends on shares of each such Fund; calculates
the daily value of the assets of the Fixed Income Fund; determines the daily net
asset value per share, net investment income and dividend rate for the Short-
Term and Fixed Income Funds; and maintains records for the foregoing services.
Under the Custodian Agreement, each such Fund has agreed to pay the Custodian
for furnishing custodian services a fee for certain administration and
transaction charges and out-of-pocket expenses.
Rules adopted under the 1940 Act permit investment companies to maintain their
securities and cash in the custody of certain eligible foreign banks and
depositories. The International Fund's portfolio of non-United States securities
are held by sub-custodians which are approved by the Trustees or a foreign
custody manager appointed by the Trustees in accordance with these rules. The
Board has appointed the Custodian as its foreign custody manager. The
determination to place assets with a particular foreign sub-custodian is made
pursuant to these rules which require a consideration of a number of factors
including, but not limited to, the reliability and financial stability of the
sub-custodian; the sub-custodian's practices, procedures and internal controls;
and the reputation and standing of the sub-custodian in its national market.
The Bank of New York received a fee of $___ for custody services for the
Growth and Income Fund for the year ended December 31, 1999. The Bank of New
York received a fee of $20,111 for custody services for the Growth and Income
Fund for the year ended December 31, 1998. For the period ended December 31,
1997 the Bank of New York received a fee of $20,738 for custody services for the
Growth and Income Fund. For the year ended December 31, 1999 the New York Fund
paid $_____ in custody fees and the Fixed Income Fund paid $_____ to Bank of New
York. For the year ended December 31, 1998, the New York Fund paid $6,797 in
custody fees and the Fixed Income Fund paid $7,098. For the year ended December
31, 1997 the New York Fund paid $5,586 in custody fees and the Fixed Income Fund
paid $9,647.
The Board of Trustees has authorized The Bank of New York in its capacity as
custodian of each such Fund to enter into Subcustodian Agreements with banks
that qualify under the 1940 Act to act as subcustodians with respect to certain
variable rate short-term tax-exempt obligations in each Fund's portfolio.
BISYS Fund Services, Inc. (the "Transfer Agent") has been retained by the
Trust to act as transfer agent and dividend disbursing agent for the Funds.
Under the Agency Agreement, BISYS Fund Services, Inc. performs general transfer
agency and dividend disbursing services. It maintains an account in the name of
each shareholder of record in each Fund reflecting purchases, redemptions, daily
dividend accruals and monthly dividend disbursements, processes purchase and
redemption requests, issues and redeems shares of each Fund, addresses and mails
all communications by each Fund to its shareholders, including financial
reports, other reports to shareholders, dividend and distribution notices, tax
notices and proxy material for its shareholder meetings, and maintains records
for the foregoing services. Under the Agency Agreement, each Fund has agreed to
pay BISYS Fund Services, Inc. $25.00 per account and subaccount (whether
maintained by the Adviser or a correspondent bank) per annum. In addition, the
Funds have agreed to pay BISYS Fund Services, Inc. certain transaction charges,
wire charges and out-of-pocket expenses incurred by BISYS Fund Services, Inc.
74
<PAGE>
In addition, BISYS Fund Services, Inc. provides certain fund accounting
services to the Funds pursuant to a Fund Accounting Agreement. Under such
agreement, BISYS Fund Services, Inc. maintains the accounting books and records
for each Fund, maintains a monthly trial balance of all ledger accounts;
performs certain accounting services for the Fund, including calculation of the
net asset value per share, calculation of the dividend and capital gain
distributions, if any, and of yield, reconciliation of cash movements with the
Fund's custodian, affirmation to the Fund's custodian of all portfolio trades
and cash settlements, verification and reconciliation with the Fund's custodian
of all daily trade activity. BISYS' fees for providing such services to the
Funds currently are paid under the Management and Administration Agreement.
INDEPENDENT AUDITORS
Ernst & Young LLP serves as the independent auditors for the Funds. Ernst &
Young LLP provides audit services, tax return preparation and assistance and
consultation in connection with Securities and Exchange Commission filings.
Ernst & Young LLP's address is 787 Seventh Avenue, New York, New York 10019.
COUNSEL
Paul, Weiss, Rifkind, Wharton & Garrison serves as counsel for the Trust and
from time to time provides advice to the Advisers.
FINANCIAL STATEMENTS
The financial statements appearing in the most current fiscal year Annual
Report to shareholders and the report thereon of the independent auditors
appearing therein, namely Ernst & Young LLP, are incorporated by reference in
this Statement of Additional Information and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
The Annual Reports to shareholders which contains the referenced statements, are
available upon request and without charge.
75
<PAGE>
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Registration Statement.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits:
Exhibit
Number Description
------ -----------
(a) -- Amended and Restated Declaration of Trust.(1)
(b) -- By-Laws of Registrant.(1)
(d1) -- Advisory Contract between Registrant and HSBC Asset
Management Americas, Inc.(2)
(c) not applicable
<PAGE>
(d2) -- Sub-Advisory Contract between HSBC Asset Management
Americas Inc. and Delaware International Advisers Ltd
with respect to International Fund.(2)
(d3) -- Amendment to Advisory Contract between HSBC Asset
Management Americas Inc. and the Trust to add Mid Cap
Fund*
(e) -- Distribution Agreement between Registrant and BISYS
Fund Services.(2)
(e1) -- Amendment to Distribution Agreement to add Mid Cap
Fund*
(g1) -- Custodian Agreement between Registrant and The Bank of
New York.(1)
(h1) -- Management and Administrative Agreement between
Registrant and BISYS Fund Services.(1)
(h2) -- Amendment to Management and Administrative Agreement
adding Mid Cap Fund*
(h3) -- Accounting Services Agreement between Registrant and
BISYS Fund Services(1)
(h4) -- Transfer Agency Agreement between Registrant and BISYS
Fund Services(1)
(h5) -- Amendment to Transfer Agency Agreement adding Mid Cap
Fund*
(h9) -- Fund Accounting Agreement between Registrant and BISYS
Fund Services(1)
(i) -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison
counsel to Registrant.*
(j) -- Consent of Ernst & Young LLP, independent
Auditors.*
K -- Not applicable
(m1) -- Revised Rule 12b-l Distribution Plan for Class A
Shares*
<PAGE>
m2 -- Revised Rule 12b-1 Distribution Plan for Class Band C
shares.*
(m3) -- Rule 12b-1 Shareholder Servicing Agreement between
Registrant and BISYS Fund Services, Inc.(1)
(m3) -- Distributor's Selected Dealer Agreement.(2)
(n) -- Financial Data Schedules*
(o) -- Rule 18f-3 Plan(2)
Other Exhibits
(1) -- Power of Attorney(3)
- -----------------------
(1) Filed with Post-Effective Amendment No. 18 to the Trust's Registration
Statement on April 29, 1997.
(2) Filed with Post-Effective Amendment No. 23 to the Trust's Registration
Statement on April 30, 1999.
(3) Filed herewith
* To be filed by Post-Effective Amendment.
Item 24. Persons Controlled by or under Common Control with Registrant.
-------------------------------------------------------------
None.
Item 25. Indemnification.
----------------
Reference is made to Article IV of Registrants By-Laws and paragraphs
9 and 10 of the Distribution Contract.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
trustees, officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the 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 the Registrant of expenses incurred
<PAGE>
or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such trustee, 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.
The Registrant has in force a National Union Fire Insurance Company
Directors and Officers Liability Policy which covers all present and
future directors and officers of Registrant against loss arising from
any civil claim or claims by reason of "any breach of duty, neglect,
error, misstatement, misleading statement, omission or act done or
wrongfully attempted" while acting as trustees or officers of the
Registrant. The period of insurance under the present policy is for
the one-year period ending August 1, 1999. The policy covers 100% of
the excess of $100,000 up to an annual aggregate limit of $10,000,000
of any losses including legal and other expenses in connection with
any claim.
Item 26. Business and Other Connections
of Investment Adviser
-------------------------------------
HSBC Asset Management Americas Inc. also serves as the investment
adviser to HSBC Funds Trust.
Item 27. Principal Underwriter
---------------------
(a) BISYS Fund Services is Sponsor and Distributor for HSBC Funds
Trust and HSBC Mutual Funds Trust ("HSBC Trusts"). BISYS also
acts as Distributor to a number of other registered investment
companies not affiliated with HSBC Trusts.
(b) Officers and Directors
Name and Positions and Positions and
Principal Business Offices with Offices with
Address Registrant Underwriter
--------------------------- -------------- ---------------------
BISYS Fund Service, Inc. None Sole General Partner
3435 Stelzer Road
Columbus, OH 43219
WC Subsidiary Corporation None Sole Limited Partner
150 Clove Road
Little Falls, New Jersey 07424
<PAGE>
(c) Not applicable.
Item 28. 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 and the rules
thereunder are maintained at the offices of:
(1) Records relating to management and advisory functions:
HSBC Asset Management Americas Inc.
250 Park Avenue
New York, NY 10177
Delaware International Advisers Ltd
One Commerce Square
Philadelphia, PA 19103
(International Equity Fund Only)
(2) Records relating to administration and distribution functions:
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
(3) Records relating to fund accounting and transfer agency functions:
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
(4) Records relating to custodial functions:
Bank of New York
90 Washington Street
New York, NY 10286
Item 29. Management Services
-------------------
Not applicable.
Item 30. Undertakings
------------
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the removal of a Trustee if requested to
do so by the holders of at least 10% of the Registrant's
outstanding shares.
(b) Registrant undertakes to provide the support to shareholders
specified in Section 16(c) of the 1940 Act as though that Section
applied to the Registrant.
(c) Registrant 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 without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 24 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 14, 2000.
HSBC MUTUAL FUNDS TRUST
(Registrant)
By: /s/
------------------------------------
Walter Grimm, President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Walter Grimm President February 14, 2000
- --------------------------
Walter Grimm
/s/ Anthony Fisher Vice President February 14, 2000
- --------------------------
Anthony Fisher
* John P Fann Trustee February 14, 2000
- --------------------------
John P Fann
* HARALD PAUMGARTEN Trustee February 14, 2000
- --------------------------
Harald Paumgarten
* ROBERT A. ROBINSON Trustee February 14, 2000
- --------------------------
Robert A. Robinson
* Jeffrey Haas Trustee February 14, 2000
- --------------------------
Jeffrey Haas
* Richard Loos Trustee February 14, 2000
- --------------------------
Richard Loos
* Clifton H.W. Maloney Trustee February 14, 2000
- --------------------------
Clifton H.W. Maloney
* John Meditz Trustee February 14, 2000
- --------------------------
John Meditz
</TABLE>
* Pursuant to Power of Attorney filed herein.
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
Other Exhibits
(1) Power of Attorney
</TABLE>
<PAGE>
HSBC MUTUAL FUNDS TRUST
POWER OF ATTORNEY
We, the undersigned Trustees of HSBC Mutual Funds Trust (the "Funds"), a
business trust organized under the laws of the Commonwealth of Massachusetts, do
hereby constitute and appoint Steven R. Howard, Thomas M. Majewski, Walter Grimm
and Anthony Fischer, and each of them individually, our true and lawful
attorneys and agents to take any and all action and execute any and all
instruments which said attorneys and agents may deem necessary or advisable to
enable the Funds to comply with:
(i) the Securities Act of 1933, as amended, and any rules,
regulations, orders or other requirements of the Securities and
Exchange Commission thereunder, in connection with the
registration under such Securities Act of 1933 of shares of
beneficial interest of the Trust to be offered by the Funds,
(ii) the Investment Company Act of 1940, as amended, and any rules,
regulations, orders or other requirements of the Securities and
Exchange Commission thereunder, in connection with the
registration of the Funds under the Investment Company Act of
1940, as amended, and
(iii) state securities laws and any rules, regulations, orders or other
requirements of state securities commissions, in connection with
the registration under state securities laws of the Funds and
with the registration under state securities laws of the shares
of beneficial interest of the Funds to be offered by the Funds,
including specifically, but without limitation of the foregoing, power and
authority to sign the name of the Funds in its behalf and to affix its seal, and
to sign the name of such Trustee in his behalf as such Trustee as indicated
below, to any amendment or supplement (including post-effective amendments) to
the registration statement or statements filed with the Securities and Exchange
Commission under such Securities Act of 1933 and such Investment Company Act of
1940, as amended, and to execute any instruments or documents filed or to be
filed as part of or in connection with such registration statement or
statements; and to execute any instruments or documents filed or to be filed as
part of or in connection with compliance with state securities laws, including,
but not limited to, all state filings for any purpose, state filings in
connection with corporate or trust organization or amending corporate or trust
documentation, filings for purposes of state tax laws and filings in connection
with blue sky regulations; and the undersigned hereby ratifies and confirms all
that said attorneys and agents shall do or cause to be done by virtue hereof.
<PAGE>
IN WITNESS WHEREOF, the undersigned place their hands this 13th day
August, 1999.
/s/ Harald Paumgarten /s/ Jeffrey J. Haas
- -------------------------- ------------------------------
Harald Paumgarten Jeffrey J. Haas
/s/ Wolfe Frankl /s/ Richard J. Loos
- -------------------------- ------------------------------
Wolfe Frankl Richard J. Loos
/s/ John Pfann /s/ Clifton H.W. Maloney
- -------------------------- ------------------------------
John Pfann Clifton H.W. Maloney
/s/ Robert Robinson /s/ John Meditz
- -------------------------- ------------------------------
Robert Robinson John Meditz
