As filed via EDGAR with the Securities and Exchange Commission
on October 28, 1997
File No. 811-8358
Registration No. 33-75250
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 10 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Post-Effective Amendment No. 10 |X|
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MUTUAL FUND TRUST
(Exact Name of Registrant as Specified in Charter)
101 Park Avenue,
New York, New York 10178
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(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code: (212) 492-1600
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Copies to:
George Martinez, Esq. Peter Eldridge, Esq Gary S. Schpero, Esq.
Mutual Fund Trust Chemical Bank Simpson Thacher & Bartlett
125 West 55th Street 270 Park Avenue 425 Lexington Avenue
New York, New York 10019 New York, New York 10017 New York, New York 10017
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
| | immediately upon filing pursuant to | | on ( ) pursuant to
paragraph (b) paragraph (b)
|_| 60 days after filing pursuant to |X| on December 28, 1997 pursuant
paragraph (a)(1) to paragraph (a)(1)
|_| 75 days after filing pursuant to |_| on ( ) pursuant to
paragraph (a)(2) paragraph (a)(2) rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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The Registrant has registered an indefinite number or amount of its shares of
common stock for each of its three series of shares under the Securities Act of
1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940 on July 18,
1994 and the Rule 24f-2 Notice for the Registrant's fiscal year ended August 31,
1996 was filed on October 23, 1996.
<PAGE>
MUTUAL FUND TRUST
Registration Statement on Form N-1A
CROSS-REFERENCE SHEET
Pursuant to Rule 495(a) under the Securities Act of 1933
VISTA(SM) NEW YORK TAX FREE INCOME FUND
VISTA(SM) CALIFORNIA INTERMEDIATE TAX FREE INCOME FUND
VISTA(SM) TAX FREE INCOME FUND
VISTA(SM) PRIME MONEY MARKET FUND
VISTA (SM) (SM) U.S. GOVERNMENT MONEY MARKET FUND
VISTA (SM) (SM) 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
VISTA (SM) (SM) CASH MANAGEMENT FUND
VISTA (SM) (SM) FEDERAL MONEY MARKET FUND
VISTA (SM) (SM) TREASURY PLUS MONEY MARKET FUND
VISTA (SM) (SM) TAX FREE MONEY MARKET FUND
VISTA (SM) (SM) NEW YORK TAX FREE MONEY MARKET FUND
VISTA (SM) (SM) CALIFORNIA TAX FREE MONEY MARKET FUND
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Item Number Statement of
Form N-1A, Additional
Part A Prospectus Caption Information Caption
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Captions in parenthesis indicate Income Fund
Prospectus captions which do not exist in
the Money Market Fund Prospectuses.
1 Front Cover Page *
2(a) Expense Summary *
(b) Not Applicable *
3(a) Financial Highlights *
(b) Not Applicable *
(c) Performance Information *
4(a)(b) Fund Objectives and Investment Approach; *
(Fund Objective; Investment Policies)
Other Information Concerning the Fund(s)
(c) Fund Objectives and Investment Approach; *
Common Investment Policies (Money Market
Funds Only); (Fund Objectives; Investment
Policies)
5(a) Management *
(b) Management *
(c) Management *
(d) Other Information Concerning the Fund(s) *
(e) Back Covers *
(f) Financial Highlights; Other Information *
Concerning the Fund(s)
5A.(a-b) Not Applicable *
6(a) Other Information Concerning the Fund(s) *
(b) Not Applicable *
(c) Not Applicable *
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Item Number Statement of
Form N-1A, Additional
Part A Prospectus Caption Information Caption
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(d) Not Applicable *
(e) How to Buy, Sell and Exchange Shares; (About
Your Investment); Other Information Concerning
the Fund(s) *
(f) How Dividends and Distributions are Made; *
Tax Information; (How Distributions are Made;
Tax Information)
(g) How Dividends and Distributions are Made; Tax Matters
Tax Information; (How Distributions are Made;
Tax Information)
(h) How to Buy, Sell and Exchange Shares; (About Your
Investment); Other Information Concerning the Fund(s) *
7(a) How to Buy, Sell and Exchange Shares; Other *
Information Concerning the Fund(s)
(b) How the Fund(s) Value Their (its) Shares; *
How to Buy, Sell and Exchange Shares;
Other Information Concerning the Fund(s)
(c) How to Buy, Sell and Exchange Shares *
(d) How to Buy, Sell and Exchange Shares *
(e) Management; Other Information Concerning *
the Fund(s)
(f) Other Information Concerning the Fund(s) Management of the
Trust and Funds
8(a) How to Buy, Sell and Exchange Shares *
(b) How to Buy, Sell and Exchange Shares *
(c) How to Buy, Sell and Exchange Shares *
(d) How to Buy, Sell and Exchange Shares *
9 Not Applicable *
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Item Number
Form N-1A, Statement of Additional
Part B Prospectus Caption Information Caption
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10 * Front Cover Page
11 * Front Cover Page
12 * Not Applicable
13 Fund Objectives and Investment Approach Investment Policies and
(Fund Objectives; Investment Policies) Restrictions
14 * Management of the Trust and Funds
15(a) * Not Applicable
(b) * Principal Holders
(c) * Principal Holders
16(a) Management Management of the Trust and Funds
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Item Number
Form N-1A, Statement of Additional
Part B Prospectus Caption Information Caption
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(b) Management Management of the Trust and Funds
(c) Other Information Concerning Management of the Trust and Funds
the Fund(s)
(d) Management Management of the Trust and Funds
(e) * Not Applicable
(f) How to Buy, Sell and Exchange Shares; Management of the Trust and Funds
Other Information Concerning the Fund(s)
(g) * Not Applicable
(h) * Management of the Trust and Funds;
Independent Accountants
(i) * Not Applicable
17 Fund Objectives and Investment Approach; Investment Policies and
(Fund Objective; Investment Policies) Restrictions
18 Other Information Concerning the Fund(s) General Information
19(a) How to Buy, Sell and Exchange Shares *
(b) How the Fund(s) Value Their (its) Shares Determination of Net Asset
Value
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Item Number
Form N-1A, Statement of Additional
Part B Prospectus Caption Information Caption
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(c) * Purchases, Redemptions
and Exchanges
20 How Dividends and Distributions Are Made; Tax Matters
Tax Information; (How Distributions are
Made; Tax Information)
21(a) * Management of the Trust and Funds
(b) * Management of the Trust and Funds
(c) * Not Applicable
22 * Performance Information
23 * Not Applicable
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Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
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<PAGE>
EXPLANATORY NOTE
The Prospectus for Vista Class shares of the Vista 100% U.S. Treasury
Securities Money Market Fund, Vista Federal Money Market Fund, Vista Treasury
Plus Money Market Fund, Vista U.S. Government Money Market Fund, Vista Cash
Management Fund, Vista Tax Free Money Market Fund, Vista New York Tax Free Money
Market Fund and Vista California Tax Free Money Market Fund; the Prospectus for
Premier Class shares of the Vista 100% U.S. Treasury Securities Money Market
Fund, Vista Federal Money Market Fund, Vista Treasury Plus Money Market Fund,
Vista U.S. Government Money Market Fund, Vista Cash Management Fund, Vista Prime
Money Market Fund and Vista Tax Free Money Market Fund; the Prospectus for
Institutional Class shares of the Vista 100% U.S. Treasury Securities Money
Market Fund, Vista Federal Money Market Fund, Vista Treasury Plus Money Market
Fund, Vista U.S. Government Money Market Fund, Vista Cash Management Fund, Vista
Prime Money Market Fund and Vista Tax Free Money Market Fund; the Prospectuses
for Class A and Class B shares of the Vista Tax Free Income Fund and Vista New
York Tax Free Income Fund, the Prospectus for shares of the Vista California
Intermediate Tax Free Income Fund, the Prospectus for Vista Class shares of the
Vista U.S. Government Money Market Fund, the Prospectus for Vista Class shares
of the Vista Federal Money Market Fund and Vista Cash Management Fund and the
Prospectus for Class A shares of the Vista Tax Free Income Fund, each dated
December 27, 1996, are incorporated by reference to the Registrant's filing of
definitive copies under rule 497(j) of the Securities Act of 1933, as amended
(the "Securities Act") on December 31, 1996.
The Prospectus Supplement for Class A and Class B shares of the Vista
Tax Free Income Fund and Vista New York Tax Free Income Fund and shares of the
Vista California Intermediate Tax Free Income Fund is incorporated by reference
to the Registrant's filing of a definitive copy under Rule 497(e) of the
Securities Act on October 8, 1997.
The Statement of Additional Information for the Vista 100% U.S.
Treasury Securities Money Market Fund, Vista Federal Money Market Fund,
Vista Treasury Plus Money Market Fund, Vista U.S. Government Money Market Fund,
Vista Cash Management Fund, Vista Tax Free Money Market Fund, Vista New York Tax
Free Money Market Fund, Vista California Tax Free Money Market Fund, Vista Prime
Money Market Fund, Vista Tax Free Income Fund, Vista New York Tax Free Income
Fund and Vista California Intermediate Tax Free Income Fund, dated December 27,
1996 (the "SAI") is incorporated by reference to the Registrant's filing of a
definitive copy under Rule 497(j) of the Securities Act on December 31, 1996.
The Statement of Additional Supplement to the SAI, dated July 18, 1997,
is incorporated by reference to the Registrant's filing of a definitive copy
under Rule 497(e) of the Securities Act on July 18, 1997.
The Prospectus for Vista Shares of Vista Cash Management Fund is
incorporated by reference to the Registrant's filing of a definitive copy
under Rule 497(j) on October 27, 1997.
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VISTA(SM)
FAMILY OF MUTUAL FUNDS
MANAGED BY CHASE MANHATTAN
PROSPECTUS
VISTA(SM) PRIME MONEY MARKET FUND
CLASS B AND C SHARES
INVESTMENT STRATEGY: CURRENT INCOME
December [__], 1997
This Prospectus explains concisely what you should know before investing.
Please read it carefully and keep it for future reference. You can find more
detailed information about the Fund in its December [__], 1997 Statement of
Additional Information, as amended periodically (the "SAI"). For a free copy of
the SAI, call the Vista Service Center at 1-800-34-VISTA. The SAI has been
filed with the Securities and Exchange Commission and is incorporated into this
Prospectus by reference.
Investors should be aware that Class B and Class C shares of the Fund are made
available for exchange purposes only and that the yield on Class B and Class C
shares will be substantially lower than other classes of shares of the Fund.
Class B and Class C shares of the Fund carry the same 0.75% distribution fee as
other Vista B and Class C shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
INVESTMENTS IN THE FUND ARE SUBJECT TO RISK--INCLUDING POSSIBLE LOSS OF
PRINCIPAL. SHARES OF THE FUND ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, THE CHASE MANHATTAN BANK OR ANY OF ITS AFFILIATES AND
ARE NOT INSURED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY.
<PAGE>
2
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TABLE OF CONTENTS
Expense Summary .......................................................... 4
The expenses you pay on your Fund investment, including examples
Financial Highlights .................................................... 6
The Fund's financial history
Fund Objective and Investment Approach .................................. 7
Other Investment Practices .............................................. 7
Management ................................................................ 12
Chase Manhattan Bank, the Fund's adviser; Chase Asset Management, the
Fund's sub-adviser
About Your Investment .................................................... 12
How to Buy, Sell and Exchange Shares ..................................... 13
How the Fund Values Its Shares ........................................... 16
How Dividends and Distributions Are Made; Tax Information ................ 17
How the Fund distributes its earnings, and tax treatment related to
those earnings
Other Information Concerning the Funds .................................. 18
Distribution plans, shareholder servicing agents, administration,
custodian, expenses and organization
Performance Information ................................................. 22
How performance is determined, stated and/or advertised
3
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing. The following
table summarizes your costs from investing in the Fund based on expenses
incurred in the most recent fiscal year. The examples show the cumulative
expenses attributable to a hypothetical $1,000 investment over specified
periods.
Class B Class C
SHAREHOLDER TRANSACTION EXPENSES Shares Shares
------- -------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ........... None None
Maximum Deferred Sales Charge
(as a percentage of the lower of original
purchase price or redemptionproceeds)* ...... 5.00% 1.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fee .......................... 0.10% 0.10%
12b-1 Fee ** ................................... 0.75% 0.75%
Shareholder Servicing Fee (after
estimated waiver)*** ........................... 0.22% 0.22%
Other Expenses (after estimated waiver
and reimbursement)*** ........................ 0.40% 0.40%
------- -------
Total Fund Operating Expenses (after waiver
of fee and expense reimbursement) *** ......... 1.47% 1.47%
======= =======
EXAMPLES
Your investment of $1,000 would
incur the following expenses,
assuming 5% annual return: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class B Shares:
Assuming complete redemption at the end
of the period+ ..................... $67 $80 $104 $160
Assuming no redemptions ............... $15 $46 $ 80 $160
Class C Shares:
Assuming complete redemption at the end
of the period+ ..................... $25 $46 $ 80 $176
Assuming no redemptions ............... $15 $46 $ 80 $176
* The maximum deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge generally
declines by 1% annually thereafter (except in the fourth year),
reaching zero after six years. The maximum deferred sales charge on
Class C shares applies to redemptions during the first year after
purchase; the charge is 1% during the first year and zero thereafter.
See "How to Buy, Sell and Exchange Shares."
** Long-term shareholders in mutual funds with 12b-1 fees, such as Class
B and Class C shareholders of the Fund, may pay more than the economic
equivalent of the maximum front-end sales charge permitted by rules of
the National Association of Securities Dealers, Inc.
*** Reflects current fee waiver and expense subsidy arrangments to maintain
Total Fund Operating Expenses at the level indicated in the table above.
Absent such arrangements, the Shareholder Servicing Fee would be 0.25%
and 0.25%, for Class B and Class C shares respectively, and Total Fund
Operating Expenses would be 1.50% and 1.50%, for Class B and Class C
shares, respectively.
+ Assumes deduction at the time of redemption of the maximum applicable
deferred sales charge.
The table is provided to help you understand the expenses of investing in the
Fund and your share of the operating expenses that the Fund incurs. The example
should not be considered a representation of past or future expenses or
returns; actual expenses and returns may be greater or less than shown.
4
<PAGE>
Charges or credits, not reflected in the expense table above, may be incurred
directly by customers of financial institutions in connection with an
investment in the Fund. The Fund understands that Shareholder Servicing Agents
may credit to the accounts of their customers from whom they are already
receiving other fees amounts not exceeding such other fees or the fees received
by the Shareholder Servicing Agent from the Fund with respect to those
accounts. See "Other Information Concerning the Fund".
5
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FINANCIAL HIGHLIGHTS
The table set forth below provides selected per share data and ratios for one
Class B Share outstanding throughout each period shown. This information is
supplemented by financial statements and accompanying notes appearing in the
Fund's Annual Report to Shareholders for the fiscal year ended August 31, 1997,
which is incorporated by reference into the SAI. Shareholders may obtain a copy
of this Annual Report by contacting the Fund or their Shareholder Servicing
Agent. The financial statements and notes, as well as the financial information
set forth in the table below, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon is also included in the Annual
Report to Shareholders.
VISTA PRIME MONEY MARKET FUND
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Class B Shares
-------------------------------------------------
Year Year Year 4/21/94*
ended ended ended through
8/31/97 8/31/96 8/31/95 8/31/94+
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period ..................... $ $ 1.00 $ 1.00 $ 1.00
-------- ------- -------- ------
Income from Investment Operations:
Net investment income ................................. 0.042 0.043 0.011
Net Realized Loss on Securities ........................ -- (0.003) --
-------- ------- -------- ------
Total Income from Investment Operations .................. 0.042 0.040 0.011
-------- ------- -------- ------
Voluntary Capital Contribution ........................... -- 0.003 --
-------- ------- -------- ------
Less Distributions:
Dividends from Net Investment Income ..................... 0.042 0.043 0.011
-------- ------- -------- ------
Net Asset Value, End of Period ........................... $ $ $1 1.00 $ 1.00
======== ======= ======== ======
Total Return ............................................. % 4.25% 4.37% 1.11%
Ratios/Supplemental Data:
Net Assets, End of Period (000 omitted) .................. $ $15,667 $ 4,880 $1,452
Ratio of Expenses to Average Net Assets # ............... % 1.47% 1.47% 1.47%
Ratio of Net Investment Income to Average Net Assets # % 4.17% 4.33% 2.96%
Ratio of Expenses without waivers and assumption
of expenses to Average Net Assets # .................. % 1.71% 2.53% 1.67%
Ratio of Net Investment Income without waivers and
assumption of expenses to Average Net Assets # ...... % 3.93% 3.27% 2.76%
</TABLE>
* Commencement of offering shares.
+ In 1994 the Prime Money Market Fund changed its fiscal year-end from
October 31 to August 31.
# Short periods have been annualized.
6
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FUND OBJECTIVE AND
INVESTMENT APPROACH
The Fund's objective is to provide maximum current income consistent with the
preservation of capital and maintenance of liquidity.
The Fund invests in high quality, short-term U.S. dollar-denominated money
market instruments. The Fund invests principally in (i) high quality commercial
paper and other short-term obligations, including floating and variable rate
master demand notes of U.S. and foreign corporations; (ii) U.S. dollar-
denominated obligations of foreign governments and supranational agencies
(e.g., the International Bank for Reconstruction and Development); (iii)
obligations issued or guaranteed by U.S. banks with total assets exceeding $1
billion (including obligations of foreign branches of such banks) and by
foreign banks with total assets exceeding $10 billion (or the equivalent in
other currencies) which have branches or agencies in the U.S. (including U.S.
branches of such banks), or such other U.S. or foreign commercial banks which
are judged by the Fund's advisers to meet comparable credit standing criteria;
(iv) securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and (v) repurchase agreements. The dollar weighted average
maturity of the Fund will be 60 days or less.
In lieu of investing directly, the Fund is authorized to seek to achieve its
objective by investing all of its investable assets in an investment company
having substantially the same investment objective and policies as the Fund.
The Fund is classified as a "diversified" fund under federal securities law.
OTHER INVESTMENT
PRACTICES
The Fund seeks to maintain a net asset value of $1.00 per share.
The Fund invests only in U.S. dollar-denominated high quality obligations which
are determined to present minimal credit risks. This credit determination must
be made in accordance with procedures established by the Board of Trustees.
Each investment must be rated in the highest short-term rating category by at
least two national rating organizations ("NROs") (or one NRO if the instrument
was rated only by one such organization) or, if unrated, must be determined to
be of comparable quality in accordance with the procedures of the Trust. If a
security has an unconditional guarantee or similar enhancement, the issuer of
the guarantee or enhancement may be relied upon in meeting these ratings
requirements rather than the issuer of the security. Securities in which the
Fund invests may not earn as high a level of current income as long-term or
lower quality securities.
The Fund purchases only instruments which have or are deemed to have remaining
maturities of 397 days or less in accordance with federal regulations. Although
the Fund seeks to be fully invested, at times it may hold uninvested cash
reserves, which would adversely affect its yield.
7
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There can be no assurance that the Fund will achieve its investment objective.
The Fund may also engage in the following investment practices, when consistent
with its overall objective and policies. These practices, and certain
associated risks, are more fully described in the SAI.
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in direct obligations of the
U.S. Treasury. The Fund may also invest in other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
(collectively, "U.S. Government Obligations"). Certain U.S. Government
Obligations, such as U.S. Treasury securities and direct pass-through
certificates of the Government National Mortgage Association (GNMA), are backed
by the "full faith and credit" of the U.S. Government. Other U.S. Government
Obligations, such as obligations of Federal Home Loan Banks and the Federal
Home Loan Mortgage Corporation, are not backed by the "full faith and credit"
of the U.S. Government. In the case of securities not backed by the "full faith
and credit" of the U.S. Government, the investor must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment, and may
not be able to assert a claim against the U.S. Government itself in the event
the agency or instrumentality does not meet its commitments.
REPURCHASE AGREEMENTS, SECURITIES LOANS AND FORWARD COMMITMENTS. The Fund may
enter into agreements to purchase and resell securities at an agreed-upon price
and time. The Fund also has the ability to lend portfolio securities in an
amount equal to not more than 30% of its total assets to generate additional
income. These transactions must be fully collateralized at all times. The Fund
may purchase securities for delivery at a future date, which may increase its
overall investment exposure and involve a risk of loss if the value of the
securities declines prior to the settlement date. These transactions involve
some risk to the Fund if the other party should default on its obligation and
the Fund is delayed or prevented from recovering the collateral or completing
the transaction.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money from
banks for temporary or short-term purposes, but will not borrow for leveraging
purposes. The Fund may also sell and simultaneously commit to repurchase a
portfolio security at an agreed-upon price and time, to avoid selling securities
during unfavorable market conditions in order to meet redemptions. Whenever the
Fund enters into a reverse repurchase agreement, it will establish a segregated
account in which it will maintain liquid assets on a daily basis in an amount at
least equal to the repurchase price (including accrued interest). The Fund would
be required to pay interest on amounts obtained through reverse repurchase
agreements, which are considered borrowings under federal securities laws.
STAND-BY COMMITMENTS. The Fund may enter into put transactions, including
transactions sometimes referred to as stand-by
8
<PAGE>
commitments, with respect to securities in its portfolio. In these
transactions, the Fund would acquire the right to sell a security at an agreed
upon price within a specified period prior to its maturity date. These
transactions involve some risk to the Fund if the other party should default on
its obligation and the Fund is delayed or prevented from recovering the
collateral or completing the transaction. Acquisition of puts will have the
effect of increasing the cost of the securities subject to the put and thereby
reducing the yields otherwise available from such securities.
STRIPS AND ZERO COUPON OBLIGATIONS. The Fund may invest up to 20% of its total
assets in stripped obligations (i.e., separately traded principal and interest
components of securities) where the underlying obligations are backed by the
full faith and credit of the U.S. Government, including instruments known as
"STRIPS". The Fund may also invest in zero coupon obligations. Zero coupon
obligations are debt securities that do not pay regular interest payments, and
instead are sold at substantial discounts from their value at maturity. The
value of STRIPS and zero coupon obligations tends to fluctuate more in response
to changes in interest rates than the value of ordinary interest-paying debt
securities with similar maturities. The risk is greater when the period to
maturity is longer.
FLOATING AND VARIABLE RATE SECURITIES; PARTICIPATION CERTIFICATES. The Fund may
invest in floating rate securities, whose interest rates adjust automatically
whenever a specified interest rate changes, and variable rate securities, whose
interest rates are periodically adjusted. Certain of these instruments permit
the holder to demand payment of principal and accrued interest upon a specified
number of days' notice from either the issuer or a third party. The securities
in which the Fund may invest include participation certificates and
certificates of indebtedness or safekeeping. Participation certificates are pro
rata interests in securities held by others; certificates of indebtedness or
safekeeping are documentary receipts for such original securities held in
custody by others. As a result of the floating or variable rate nature of these
investments, the Fund's yield may decline and it may forego the opportunity for
capital appreciation during periods when interest rates decline; however,
during periods when interest rates increase, the Fund's yield may increase and
it may have reduced risk of capital depreciation. Demand features on certain
floating or variable rate securities may obligate the Fund to pay a "tender
fee" to a third party. Demand features provided by foreign banks involve
certain risks associated with foreign investments.
OTHER MONEY MARKET FUNDS. The Fund may invest up to 10% of its total assets in
shares of other money market funds when consistent with its investment objective
and policies, subject to applicable regulatory limitations. Additional fees may
be charged by other money market funds.
BANK OBLIGATIONS. Bank obligations include certificates of deposit, time
deposits and bankers'
9
<PAGE>
acceptances issued or guaranteed by U.S. banks (including their foreign
branches) and foreign banks (including their U.S. branches). These obligations
may be general obligations of the parent bank or may be limited to the issuing
branch by the terms of the specific obligation or by government regulation.
Foreign bank obligations involve certain risks associated with foreign
investing.
ASSET-BACKED SECURITIES. Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments generated by particular
assets, most often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables.
MUNICIPAL OBLIGATIONS. The Fund may invest in high-quality, short-term
municipal obligations that carry yields that are competitive with those of
other types of money market instruments in which it may invest. Dividends paid
by the Fund that are derived from interest on municipal obligations will be
taxable to shareholders for federal income tax purposes.
SECURITIES OF FOREIGN GOVERNMENTS AND SUPRANATIONAL AGENCIES. The Fund intends
to invest a substantial portion of its assets from time to time in securities of
foreign governments and supranational agencies. The Fund will limit its
investments in foreign government obligations to the commercial paper and other
short-term notes issued or guaranteed by the governments of Western Europe,
Australia, New Zealand, Japan and Canada. Obligations of supranational agencies,
such as the International Bank for Reconstruction and Development (also known as
the World Bank) are supported by subscribed, but unpaid, commitments of its
member countries. There is no assurance that these commitments will be
undertaken or complied with in the future, and foreign and supranational
securities are subject to certain risks associated with foreign investing.
CUSTODIAL RECEIPTS. The Fund may acquire securities in the form of custodial
receipts that evidence ownership of future interest payments, principal
payments or both on certain U.S. Treasury notes or bonds in connection with
programs sponsored by banks and brokerage firms. These are not deemed U.S.
Government securities. These notes and bonds are held in custody by a bank on
behalf of the owners of the receipts.
PORTFOLIO TURNOVER. It is intended that the Fund will be fully managed by
buying and selling securities, as well as holding securities to maturity. The
frequency of the Fund's portfolio transactions will vary from year to year. In
managing the Fund, the Fund's advisers will seek to take advantage of market
developments, yield disparities and variations in the creditworthiness of
issuers. More frequent turnover will generally result in higher transactions
costs, including dealer mark-ups.
LIMITING INVESTMENT RISKS Specific regulations and investment restrictions help
the Fund limit investment risks for shareholders. These regulations and
restrictions prohibit the Fund from: (a) with
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certain limited exceptions, investing more than 5% of its total assets in the
securities of any one issuer (this limitation does not apply to U.S. Government
Obligations held by the Fund); (b) investing more than 10% of its net assets in
illiquid securities (which include securities restricted as to resale unless
they are determined to be readily marketable in accordance with procedures
established by the Board of Trustees); or (c) investing more than 25% of its
total assets in any one industry (excluding U.S. Government Obligations and
bank obligations). A complete description of these and other investment
policies is included in the SAI. Except for the Fund's investment objective,
restriction (c) above and investment policies designated as fundamental above
or in the SAI, the Fund's investment policies are not fundamental. The Trustees
may change any non-fundamental investment policy without shareholder approval.
RISK FACTORS
There can be no assurance that the Fund will be able to maintain a stable net
asset value. Changes in interest rates may affect the value of the obligations
held by the Fund. The value of fixed income securities varies inversely with
changes in prevailing interest rates, although money market instruments are
generally less sensitive to changes in interest rates than are longer-term
securities. For certain other risks associated with the Fund's additional
investment activities, see the above discussion of those activities.
The Fund is permitted to invest any portion of its assets in obligations of
domestic banks (including their foreign branches), and in obligations of
foreign issuers. The ability to concentrate in the banking industry may involve
certain credit risks, such as defaults or downgrades, if at some future date
adverse economic conditions prevail in such industry. U.S. banks are subject to
extensive governmental regulations which may limit both the amount and types of
loans which may be made and interest rates which may be charged. In addition,
the profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. General economic conditions as well
as exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operations of this industry.
Securities issued by foreign banks, foreign branches of U.S. banks and foreign
governmental and private issuers involve investment risks in addition to those
of domestic obligations of domestic issuers, including risks relating to future
political and economic developments, more limited liquidity of foreign
obligations than comparable domestic obligations, the possible imposition of
withholding taxes on interest income, the possible seizure or nationalization
of foreign assets, and the possible establishment of exchange controls or other
restrictions. There may be less publicly available information concerning
foreign issuers there may be difficulties in obtaining or enforcing a judgment
against a foreign issuer (including branches) and accounting, auditing and
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financial reporting standards and practices may differ from those applicable to
U.S. issuers. In addition, foreign banks are not subject to regulations
comparable to U.S. banking regulations.
MANAGEMENT
THE FUND'S ADVISERS
The Chase Manhattan Bank ("Chase") acts as investment adviser to the Fund
pursuant to an Investment Advisory Agreement and has overall responsibility for
investment decisions of the Fund, subject to the oversight of the Board of
Trustees. Chase is a wholly-owned subsidiary of The Chase Manhattan
Corporation, a bank holding company. Chase and its predecessors have over 100
years of money management experience. For its investment advisory services to
the Fund, Chase is entitled to receive an annual fee computed daily and paid
monthly at an annual rate equal to 0.10% of the Fund's average daily net
assets. Chase is located at 270 Park Avenue, New York, New York 10017.
Chase Asset Management, Inc. ("CAM"), a registered investment adviser, is the
sub-investment adviser to the Fund pursuant to a Sub-Investment Advisory
Agreement between CAM and Chase. CAM is a wholly-owned operating subsidiary of
Chase. CAM makes investment decisions for the Fund on a day-to-day basis. For
these services, CAM is entitled to receive a fee, payable by Chase from its
advisory fee, at an annual rate equal to 0.03% of the Fund's average daily net
assets. CAM provides discretionary investment advisory services to
institutional clients. The same individuals who serve as portfolio managers for
Chase also serve as portfolio managers for CAM. CAM is located at 1211 Avenue
of the Americas, New York, New York 10036.
ABOUT YOUR INVESTMENT
Investors should be aware that Class B shares of the Fund are made available
only for purposes of exchanges from Class B shares of other Vista funds and
Class C shares of the Fund are made available only for purposes of exchanges
from Class C shares of other Vista funds.
CLASS B SHARES. Class B shares are subject to an annually declining contingent
deferred sales charge ("CDSC") if redeemed within a specified period after
purchase. However, no contingent deferred sales charge is imposed on the Class
B shares being disposed of in an exchange into the Fund.
CLASS C SHARES. Class C shares redeemed within one year after purchase are
subject to a CDSC equal to 1% of the lesser of their original cost or the net
asset value at the time of the redemption. If you hold your shares for one year
or more, you will receive the entire net asset value of your shares upon
redemption. As in the case of Class B shares, no contingent deferred sales
charge is imposed on the Class C shares being disposed of in an exchange into
the Fund.
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HOW TO BUY, SELL AND EXCHANGE SHARES
HOW TO BUY SHARES
Class B and Class C shares of the Fund may only be acquired via exchange from
the same class of another Vista fund and only if the account registrations are
identical. Class B and Class C shares of the Fund are sold by the Fund's
distributor without an initial sales load at the net asset value next
determined after your exchange order is received in proper form on any business
day during which the Federal Reserve Bank of New York and the New York Stock
Exchange are open for business ("Fund Business Day"). To receive that day's
dividend, the Vista Service Center or your investment representative or
shareholder servicing agent must generally receive your order prior to the
Fund's Cut-off Time, which is 2:00 p.m., Eastern time. The Fund reserves the
right to set an earlier Cut-off Time on any Fund Business Day on which the
Public Securities Association ("PSA") recommends an early close to trading on
the U.S. Government securities market. Generally, such earlier Cut-Off Time
will be noon (Eastern time). The PSA is the trade association that represents
securities firms and banks that underwrite, trade and sell debt securities,
both domestically and internationally. Orders for shares received after the
Fund's Cut-off Time and prior to 4:00 p.m., Eastern time on any Fund Business
Day will not be accepted and executed on the same day except at the Fund's
discretion. Orders received and not accepted after the Fund's Cut-off Time will
be considered received prior to the Fund's Cut-off Time on the following Fund
Business Day and processed accordingly. The Fund reserves the right to reject
any purchase order.
Class B Shares
Class B shares are sold without an initial sales charge, although a CDSC will
be imposed if you redeem shares within a specified period after purchase, as
shown in the table below. The following types of shares may be redeemed without
charge at any time: (i) shares acquired by reinvestment of distributions and
(ii) shares otherwise exempt from the CDSC, as described below. For other
shares, the amount of the charge is determined as a percentage of the lesser of
the current market value or purchase price of shares being redeemed.
Year 1 2 3 4 5 6 7 8+
- ---------------------------------------------------------------
CDSC 5% 4% 3% 3% 2% 1% 0% 0%
In determining whether a CDSC is payable on any redemption, the Fund will first
redeem shares not subject to any charge, and then shares held longest during
the CDSC period. The holding period of Class B shares of the Fund will be
calculated from the date that the Class B shares were initially acquired in one
of the other Vista funds. Those Class B shares being redeemed will be
considered to represent capital appreciation or dividend and capital gain
distribution reinvestments in other funds (if applicable) and then shares held
for the longest period of time. As a result, the CDSC imposed should be the
lowest possible rate. When a share that has appreciated in value is redeemed
during the CDSC period, a CDSC is assessed only
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on its initial purchase price. For further information on how sales charges are
calculated if you exchange your shares, see "How to Exchange Your Shares."
The CDSC will be waived on redemption of Class B shares arising out of death or
disability or in connection with certain withdrawals from IRA or other
retirement plans. Up to 12% of the value of Class B shares subject to a
systematic withdrawal plan may also be redeemed each year without a CDSC,
provided that the Class B account had a minimum balance of $20,000 at the time
the systematic withdrawal plan was established. The SAI contains additional
information about CDSC waivers.
Class C Shares
Class C shares are sold without an initial sales charge, although a CDSC will
be imposed if you redeem shares within one year after purchase. The following
types of shares may be redeemed without charge at any time: (i) shares acquired
by reinvestment of distributions and (ii) shares otherwise exempt from the
CDSC, as described below. For other shares, the amount of the charge is
determined as a percentage of the lesser of the current market value or the
purchase price of shares being redeemed.
In determining whether a CDSC is payable on any redemption, the Fund will first
redeem shares not subject to any charge, and then shares held longest during
the CDSC period. The holding period of Class C shares of the Fund will be
calculated from the date that the Class C shares were initially acquired in one
of the other Vista funds. Those Class C shares being redeemed will be
considered to represent capital appreciation or dividend and capital gain
distribution reinvestments in other funds (if applicable) and then shares held
for the longest period of time. As a result, the CDSC imposed should be the
lowest possible rate. When a share that has appreciated in value is redeemed
during the CDSC period, a CDSC is assessed only on its initial purchase price.
For further information on how sales charges are calculated if you exchange
your shares, see "How to Exchange Your Shares."
HOW TO SELL SHARES
You can sell your Fund shares on any Fund Business Day either directly or
through your investment representative or shareholder servicing agent. The Fund
will only forward redemption payments on shares for which it has collected
payment of the purchase price.
SELLING SHARES DIRECTLY TO THE FUND. Send a signed letter of instruction to the
Vista Service Center. The price you receive is the next net asset value
calculated after your request is received in proper form, less any applicable
CDSC.
If you want your redemption proceeds sent to an address other than your address
as it appears on Vista's records, a signature guarantee is required. The Fund
may require additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner. Contact the Vista
Service Center for details.
The Fund generally sends you payment for your shares the Fund Business Day
after your request is received in proper form, provided your request is
received by the Vista
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Service Center prior to the Fund's Cut-off Time, and assuming the Fund has
collected payment of the purchase price of your shares. Under unusual
circumstances, the Fund may suspend redemptions, or postpone payment for more
than seven business days, as permitted by federal securities laws.
You may use Vista's Telephone Redemption Privilege to redeem shares from your
account unless you have notified the Vista Service Center of an address change
within the preceding 30 days. Telephone redemption requests in excess of
$25,000 will only be made by wire to a bank account on record with the Fund.
Unless an investor indicates otherwise on the account application, the Fund
will be authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide the Fund with his or her account registration
and address as it appears on the Fund's records.
The Vista Service Center will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. An investor agrees, however, that to
the extent permitted by applicable law, neither the Fund nor its agents will be
liable for any loss, liability, cost or expense arising out of any redemption
request, including any fraudulent or unauthorized request. For information,
consult the Vista Service Center.
During periods of unusual market changes and shareholder activity, you may
experience delays in contacting the Vista Service Center by telephone. In this
event, you may wish to submit a written redemption request, or contact your
investment representative or shareholder servicing agent. The Telephone
Redemption Privilege may be modified or terminated without notice.
SYSTEMATIC WITHDRAWAL PLAN. Make regular withdrawals of $100 or more monthly,
quarterly or semi-annually. Call the Vista Service Center at 1-800-34-VISTA for
complete instructions.
SELLING SHARES THROUGH YOUR INVESTMENT REPRESENTATIVE OR YOUR SHAREHOLDER
SERVICING AGENT. Your investment representative or your shareholder servicing
agent must receive your request before the Fund's Cut-off Time to receive that
day's net asset value. Your representative will be responsible for furnishing
all necessary documentation to the Vista Service Center.
INVOLUNTARY REDEMPTION OF ACCOUNTS. The Fund may involuntarily redeem your
shares if the aggregate net asset value of the shares in your account is less
than $500. In the event of any such redemption, you will receive at least 60
days' notice prior to the redemption. In the event the Fund redeems Class B or
Class C shares pursuant to this provision, no CDSC will be imposed.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares for shares of the same class of certain
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other Vista funds at net asset value beginning 15 days after purchase, subject
to any minimum investment requirement. Not all Vista funds offer all classes of
shares. The prospectus of the other Vista fund into which shares are being
exchanged should be read carefully and retained for future reference. If you
exchange shares subject to a CDSC, the transaction will not be subject to the
CDSC. However, when you redeem the shares acquired through the exchange, the
redemption may be subject to the CDSC, depending upon when you originally
purchased the shares. The CDSC will be computed using the schedule of any fund
into or from which you have exchanged your shares that would result in your
paying the highest CDSC applicable to your class of shares. In computing the
CDSC, the length of time you have owned your shares will be measured from the
date of original purchase and will not be affected by any exchange.
EXCHANGING BY PHONE. A Telephone Exchange Privilege is currently available.
Call the Vista Service Center for procedures for telephone transactions. Ask
your investment representative or the Vista Service Center for prospectuses of
other Vista funds. Shares of certain Vista funds are not available to residents
of all states.
EXCHANGE PARAMETERS. The exchange privilege is not intended as a vehicle for
short-term trading. Excessive exchange activity may interfere with portfolio
management and have an adverse effect on all shareholders. In order to limit
excessive exchange activity and in other circumstances where Vista management
or the Trustees believe doing so would be in the best interests of the Fund,
the Fund reserves the right to revise or terminate the exchange privilege,
limit the amount or number of exchanges or reject any exchange. In addition,
any shareholder who makes more than ten exchanges of shares involving the Fund
in a year or three in a calendar quarter will be charged a $5.00 administration
fee for each such exchange. Shareholders would be notified of any such action
to the extent required by law. Consult the Vista Service Center before
requesting an exchange. See the SAI to find out more about the exchange
privilege.
HOW THE FUND
VALUES ITS SHARES
The net asset value of each class of the Fund's shares is currently determined
daily as of 4:00 p.m., Eastern time on each Fund Business Day by dividing the
net assets of the Fund attributable to such class by the number of shares of
such class outstanding at the time the determination is made. Effective with
the anticipated introduction of certain automated share purchase programs, the
net asset value of shares of each class of the Fund will also be determined as
of 6:00 p.m., Eastern time on each Fund Business Day if the Fund is available
through these programs.
The portfolio securities of the Fund are valued at their amortized cost in
accordance with federal securities laws, certain requirements of which are
summarized under "Other Investment Practices." This method increases stability
in valuation, but may result in periods during which
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the stated value of a portfolio security is higher or lower than the price the
Fund would receive if the instrument were sold. It is anticipated that the net
asset value of each share will remain constant at $1.00 and the Fund will
employ specific investment policies and procedures to accomplish this result,
although no assurance can be given that it will be able to do so on a
continuing basis. The Board of Trustees will review the holdings of the Fund at
intervals it deems appropriate to determine whether the Fund's net asset value
calculated by using available market quotations (or an appropriate substitute
which reflects current market conditions) deviates from $1.00 per share based
upon amortized cost. In the event the Trustees determine that a deviation
exists that may result in material dilution or other unfair results to
investors or existing shareholders, the Trustees will take such corrective
action as they regard as necessary and appropriate.
HOW DIVIDENDS AND
DISTRIBUTIONS ARE
MADE; TAX INFORMATION
The net investment income of each class of shares of the Fund is declared as a
dividend to the shareholders on each Fund Business Day. Dividends are declared
as of the time of day which corresponds to the latest time on that day that the
Fund's net asset value is determined. Shares begin accruing dividends on the
day they are purchased. Dividends are distributed monthly. Unless a shareholder
arranges to receive dividends in cash or by ACH to a pre-established bank
account, dividends are distributed in the form of additional shares. Dividends
that are otherwise taxable are still taxable to you whether received in cash or
additional shares. Net short-term capital gain, if any, will be distributed at
least annually. The Fund does not expect to realize net long-term capital
gains.
Net investment income for the Fund consists of all interest accrued and
discounts earned less, amortization of any market premium on the portfolio
assets of the Fund, and the accrued expenses of the Fund.
The Fund intends to qualify as a "regulated investment company" for federal
income tax purposes and to meet all other requirements that are necessary for
it to be relieved of federal taxes on income and gains it distributes to you.
The Fund intends to distribute substantially all of its ordinary income and
capital gain net income on a current basis. If the Fund does not qualify as a
regulated investment company for any taxable year or does not make
distributions as it intends, the Fund will be subject to tax on all of its
income and gains.
Distributions by the Fund of its ordinary income and short-term capital gains
are generally taxable to you as ordinary income. Such distributions will
generally be subject to state and local taxes, but may be exempt if paid out of
interest on municipal obligations of the state or locality in which you reside.
Distributions by the Fund of any net long-term capital gains would be taxable
as such, regardless of the length of time you have held your shares.
Distributions will be
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taxable in the same manner for federal income tax purposes whether received in
cash or in shares through the reinvestment of distributions.
To the extent distributions are attributable to interest from obligations of
the U.S. Government and certain of its agencies and instrumentalities, such
distributions may be exempt from certain types of state and local taxes.
Early in each calendar year the Fund will notify you of the amount and tax
status of distributions paid to you for the preceding year. The foregoing is a
summary of certain federal income tax consequences of investing in the Fund.
You should consult your tax adviser to determine the precise effect of an
investment in the Fund on your particular tax situation (including possible
liability for state and local taxes and, for foreign shareholders, U.S.
withholding taxes).
OTHER INFORMATION
CONCERNING THE FUND
DISTRIBUTION PLANS
The Fund's distributor is Vista Fund Distributors, Inc. ("VFD"). VFD is a
subsidiary of The BISYS Group, Inc. and is unaffiliated with Chase. The Fund
has adopted a Rule 12b-1 distribution plan for Class B and Class C shares which
provides that the Fund will pay distribution fees at annual rates of up to
0.75% of the average daily net assets attributable to its Class B and Class C
shares, respectively. Payments under the distribution plan shall be used to
compensate or reimburse the Fund's distributor and broker-dealers for services
provided and expenses incurred in connection with the sale of Class B and Class
C shares, and are not tied to the amount of actual expenses incurred. Some
activities intended to promote the sale of Class B and Class C shares will be
conducted generally by the Vista Family of Funds, and activities intended to
promote the Fund's Class B and Class C shares may also benefit the Fund's other
shares and other Vista funds.
VFD may provide promotional incentives to broker-dealers that meet specified
sales targets for one or more Vista Funds. These incentives may include gifts
of up to $100 per person annually; an occasional meal, ticket to a sporting
event or theater for entertainment for broker-dealers and their guests; and
payment or reimbursement for travel expenses, including lodging and meals, in
connection with attendance at training and educational meetings within and
outside the U.S.
SHAREHOLDER SERVICING AGENTS
The Fund has entered into shareholder servicing agreements with certain
shareholder servicing agents (including Chase) under which the shareholder
servicing agents have agreed to provide certain support services to their
customers, including one or more of the following: assisting with purchase and
redemption transactions, maintaining shareholder accounts and records,
furnishing customer statements, transmitting shareholder reports and
communications to customers and other similar shareholder liaison services.
For performing these services, each shareholder servicing agent receives an
annual fee of up to
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0.25% of the average daily net assets of the Class B or Class C shares of the
Fund held by investors for whom the shareholder servicing agent maintains a
servicing relationship. Shareholder servicing agents may subcontract with other
parties for the provision of shareholder support services.
Shareholder servicing agents may offer additional services to their customers,
including specialized procedures and payment for the purchase and redemption of
Fund shares, such as pre-authorized or systematic purchase and redemption
programs, "sweep" programs, cash advances and redemption checks. Each
shareholder servicing agent may establish its own terms and conditions,
including limitations on the amounts of subsequent transactions, with respect
to such services. Certain shareholder servicing agents may (although they are
not required by the Trust to do so) credit to the accounts of their customers
from whom they are already receiving other fees amounts not exceeding such
other fees or the fees for their services as shareholder servicing agents. For
shareholders that bank with Chase, Chase may aggregate investments in the Vista
Funds with balances held in Chase bank accounts for purposes of determining
eligibility for certain bank privileges that are based on specified minimum
balance requirements, such as reduced or no fees for certain banking services
or preferred rates on loans and deposits. Chase and certain broker-dealers and
other shareholder servicing agents may, at their own expense, provide gifts,
such as computer software packages, guides and books related to investment or
additional Fund shares valued up to $250 to their customers that invest in the
Vista Funds.
Chase and/or VFD may from time to time, at their own expense out of
compensation retained by them from the Fund or other sources available to them,
make additional payments to certain selected dealers or other shareholder
servicing agents for performing administrative services for their customers.
These services include maintaining account records, processing orders to
purchase, redeem and exchange Fund shares and responding to certain customer
inquiries. The amount of such compensation may be up to an additional 0.10%
annually of the average net assets of the Fund attributable to shares of the
Fund held by customers of such shareholder servicing agents. Such compensation
does not represent an additional expense to the Fund or its shareholders, since
it will be paid by Chase and/or VFD.
ADMINISTRATOR AND
SUB-ADMINISTRATOR
Chase acts as the Fund's administrator and is entitled to receive a fee
computed daily and paid monthly at an annual rate equal to 0.05% of the Fund's
average daily net assets.
VFD provides certain sub-administrative services to the Fund pursuant to a
distribution and sub-administration agreement and is entitled to receive a fee
for these services from the Fund at an annual rate equal to 0.05% of the Fund's
average daily net assets. VFD has agreed to use a portion of this fee to
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pay for certain expenses incurred in connection with organizing new series of
the Trust and certain other ongoing expenses of the Trust. VFD is located at
101 Park Avenue, New York, New York 10178.
CUSTODIAN
Chase acts as custodian and fund accountant for the Fund and receives
compensation under an agreement with the Fund. Securities and cash of the Fund
may be held by sub-custodian banks if such arrangements are reviewed and
approved by the Trustees.
EXPENSES
The Fund pays the expenses incurred in its operations, including its pro rata
share of expenses of the Trust. These expenses include investment advisory and
administrative fees; the compensation of the Trustees; registration fees;
interest charges; taxes; expenses connected with the execution, recording and
settlement of security transactions; fees and expenses of the Fund's custodian
for all services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to government offices and commissions; expenses of
meetings of investors; fees and expenses of independent accountants, of legal
counsel and of any transfer agent, registrar or dividend disbursing agent of
the Trust; insurance premiums; and expenses of calculating the net asset value
of, and the net income on, shares of the Fund. Shareholder servicing and
distribution fees are allocated to specific classes of the Fund. In addition,
the Fund may allocate transfer agency and certain other expenses by class.
Service providers to the Fund may, from time to time, voluntarily waive all or
a portion of any fees to which they are entitled.
ORGANIZATION AND
DESCRIPTION OF SHARES
The Fund is a portfolio of Mutual Fund Trust, an open-end management investment
company organized as a Massachusetts business trust in 1994 (the "Trust"). The
Trust has reserved the right to create and issue additional series and classes.
Each share of a series or class represents an equal proportionate interest in
that series or class with each other share of that series or class. The shares
of each series or class participate equally in the earnings, dividends and
assets of the particular series or class. Shares have no preemptive or
conversion rights. Shares when issued are fully paid and non-assessable, except
as set forth below. Shareholders are entitled to one vote for each whole share
held, and each fractional share shall be entitled to a proportionate fractional
vote, except that Trust shares held in the treasury of the Trust shall not be
voted. Shares of each class of the Fund generally vote together except when
required under federal securities laws to vote separately on matters that only
affect a particular class, such as the approval of distribution plans for a
particular class. Fund shares will be maintained in book entry form, and no
certificates representing shares owned will be issued to shareholders.
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The Fund issues multiple classes of shares. This Prospectus relates only to
Class B and Class C shares of the Fund. The Fund may offer other classes of
shares in addition to these classes and may determine not to offer certain
classes of shares. The categories of investors that are eligible to purchase
shares and minimum investment requirements may differ for each class of Fund
shares. In addition, other classes of Fund shares may be subject to differences
in sales charge arrangements, ongoing distribution and service fee levels, and
levels of certain other expenses, which will affect the relative performance of
the different classes. Investors may call 1-800-34-VISTA to obtain additional
information about other classes of shares of the Fund that are offered. Any
person entitled to receive compensation for selling or servicing shares of the
Fund may receive different levels of compensation with respect to one class of
shares over another.
The business and affairs of the Trust are managed under the general direction
and supervision of the Trust's Board of Trustees. The Trust is not required to
hold annual meetings of shareholders but will hold special meetings of
shareholders of all series or classes when in the judgment of the Trustees it
is necessary or desirable to submit matters for a shareholder vote. The
Trustees will promptly call a meeting of shareholders to remove a trustee(s)
when requested to do so in writing by record holders of not less than 10% of
all outstanding shares of the Trust.
Under Massachusetts law, shareholders of such a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
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PERFORMANCE INFORMATION
The Fund may advertise its annualized "yield" and its "effective yield".
Annualized "yield" is determined by assuming that income generated by an
investment in the Fund over a stated seven-day period (the "yield") will
continue to be generated each week over a 52-week period. It is shown as a
percentage of such investment. "Effective yield" is the annualized "yield"
calculated assuming the reinvestment of the income earned during each week of
the 52-week period. The "effective yield" will be slightly higher than the
"yield" due to the compounding effect of this assumed reinvestment.
Investment performance may from time to time be included in advertisements
about the Fund. Performance is calculated separately for each class of shares.
Because this performance information is based on historical earnings, it should
not be considered as an indication or representation of future performance.
Investment performance, which will vary, is based on many factors, including
market conditions, the composition of the Fund's portfolio, the Fund's
operating expenses and which class of shares you purchase. Investment
performance also reflects the risks associated with the Fund's investment
objective and policies. These factors should be considered when comparing the
Fund's investment results to those of other mutual funds and investment
vehicles. Quotations of investment performance for any period when an expense
limitation was in effect will be greater if the limitation had not been in
effect. The Fund's performance may be compared to other mutual funds, relevant
indices and rankings prepared by independent services. See the SAI.
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<PAGE>
VISTA SERVICE CENTER
P.O. Box 419392
Kansas City, MO 64141-6392
TRANSFER AGENT AND DIVIDEND PAYING AGENT
DST Systems, Inc.
210 West 10th Street
Kansas City, MO 64105
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
VISTA
FAMILY OF MUTUAL FUNDS
MANAGED BY CHASE MANHATTAN
P.O. Box 419392
Kansas City, MO 64141-6392
VPRMB-1-1296X
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
December __, 1997
VISTA(SM) U.S. GOVERNMENT MONEY MARKET FUND
VISTA(SM) 100% U.S. TREASURY SECURITIES MONEY MARKET FUND
VISTA(SM) CASH MANAGEMENT FUND
VISTA(SM) PRIME MONEY MARKET FUND
VISTA(SM) FEDERAL MONEY MARKET FUND
VISTA(SM) TREASURY PLUS MONEY MARKET FUND
VISTA(SM) TAX FREE MONEY MARKET FUND
VISTA(SM) CALIFORNIA TAX FREE MONEY MARKET FUND
VISTA(SM) NEW YORK TAX FREE MONEY MARKET FUND
VISTA(SM) TAX FREE INCOME FUND
VISTA(SM) NEW YORK TAX FREE INCOME FUND
VISTA(SM) CALIFORNIA INTERMEDIATE TAX FREE INCOME FUND
101 Park Avenue, New York, New York 10178
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
Prospectuses offering shares of the Funds. This Statement of Additional
Information should be read in conjunction with the Prospectuses offering shares
of Vista Tax Free Income Fund, Vista California Intermediate Tax Free Income
Fund and Vista New York Tax Free Income Fund (collectively the "Income Funds"),
and Vista U.S. Government Money Market Fund, Vista 100% U.S. Treasury
Securities Money Market Fund, Vista Cash Management Fund, Vista Prime Money
Market Fund, Vista Federal Money Market Fund, Vista Treasury Plus Money Market,
Vista Tax Free Money Market Fund, Vista California Tax Free Money Market Fund
and Vista New York Tax Free Money Market Fund (collectively the "Money Market
Funds"). Any reference to a "Prospectus" in this Statement of Additional
Information is a reference to one or more of the foregoing Prospectuses, as the
context requires. Copies of each Prospectus may be obtained by an investor
without charge by contacting Vista Fund Distributors, Inc. ("VFD"), the Funds'
distributor (the "Distributor"), at the above-listed address. This Statement of
Additional Information is NOT a prospectus and is authorized for distribution
to prospective investors only if preceded or accompanied by an effective
prospectus.
For more information about your account, simply call or write the Vista Service
Center at:
1-800-622-4273
Vista Service Center
P.O. Box 419392
Kansas City, MO 64141
MFT-SAI
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Table of Contents Page
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The Funds .......................................................... 3
Investment Policies and Restrictions .............................. 3
Performance Information ............................................ 19
Determination of Net Asset Value .................................. 24
Purchases, Redemptions and Exchanges .............................. 25
Tax Matters ........................................................ 28
Management of the Trust and Funds .................................. 34
Independent Accountants ............................................ 50
Certain Regulatory Matters ........................................ 50
General Information ................................................ 50
Appendix A Description of Certain Obligations
Issued or Guaranteed by U.S. Government
Agencies or Instrumentalities .................................... A-1
Appendix B Description of Ratings .................................. B-1
Appendix C Special Investment Considerations
Relating to New York Municipal Obligations ........................ C-1
Appendix D Special Investment Considerations
Relating to California Municipal Obligations ..................... D-1
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THE FUNDS
Mutual Fund Trust (the "Trust") is an open-end management investment
company which was organized as a business trust under the laws of the
Commonwealth of Massachusetts on February 4, 1994. The Trust presently consists
of 12 separate series (the "Funds"). Certain of the Funds are diversified and
other Funds are non-diversified, as such term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). The shares of the Funds are
collectively referred to in this Statement of Additional Information as the
"Shares." The Income Funds, Tax Free Money Market Fund, New York Tax Free Money
Market Fund and California Tax Free Money Market Fund are collectively referred
to herein as the "Tax Free Funds."
On August 25, 1994, the shareholders of each of the existing classes of
Shares of the Vista U.S. Government Money Market Fund, Vista Global Money
Market Fund, Vista Prime Money Market Fund, Vista Tax Free Money Market Fund,
Vista California Money Market Fund, Vista New York Tax Free Money Market Fund,
Vista Tax Free Income Fund, Vista New York Tax Free Income Fund and the Vista
California Intermediate Tax Free Income Fund approved the reorganization of
each of such Funds into newly-created series of Mutual Fund Trust, effective
October 28, 1994. Prior to such approvals, each of such Funds were series of
Mutual Fund Group, an affiliated investment company.
On December 4, 1992, the shareholders of each of the existing classes of
Shares of Vista Global Money Market Fund and Vista U.S. Government Money Market
Fund approved the reorganization of each of such Funds into newly-created
series of Mutual Fund Group, effective January 1, 1993. Prior to such
approvals, on December 4, 1992, the shareholders of each of the five existing
series of Trinity Assets Trust (Trinity Money Market Fund, Trinity Government
Fund, Trinity Bond Fund, Trinity Short-Term Bond Fund and Trinity Equity Fund)
(collectively, the "Trinity Funds") approved the reorganization of each of the
Trinity Funds into newly-created series of the Trust, effective January 1,
1993. Vista Global Money Market Fund and Trinity Money Market Fund were
reorganized into classes of Shares of "Vista Worldwide Money Market Fund",
which changed its name to "Vista Global Money Market Fund" as of December 31,
1992. Vista U.S. Government Money Market Fund and Trinity Government Fund were
reorganized into classes of Shares of "Vista Government Cash Fund", which
changed its name to "Vista U.S. Government Money Market Fund" as of December
31, 1992.
On May 3, 1996, The U.S. Treasury Money Market Fund of The Hanover Funds,
Inc. ("Hanover") merged into the Vista Shares of Treasury Plus Money Market
Fund, The Government Money Market Fund of Hanover merged into the Vista Shares
of U.S. Government Money Market Fund, The Cash Management Fund of Hanover
merged into the Vista Shares of Vista Global Money Market Fund (The Cash
Management Fund of Hanover was the accounting survivor of this merger), The Tax
Free Money Market Fund of Hanover merged into the Vista Shares of Tax Free
Money Market Fund, The New York Tax Free Money Market Fund of Hanover merged
into the Vista Shares of New York Tax Free Money Market Fund, and The 100% U.S.
Treasury Securities Money Market Fund of Hanover merged into the Vista Shares
of The 100% U.S. Treasury Securities Money Market Fund. The foregoing mergers
are referred to herein as the "Hanover Reorganization."
Effective as of May 6, 1996, Vista Global Money Market Fund changed its
name to Vista Cash Management Fund.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust including the Funds. The Chase Manhattan Bank ("Chase") is
the investment adviser for the Funds. Chase also serves as the Trust's
administrator (the "Administrator") and supervises the overall administration
of the Trust, including the Funds. A majority of the Trustees of the Trust are
not affiliated with the investment adviser or sub-advisers.
INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies
The Prospectuses set forth the various investment policies applicable to
each Fund. The following information supplements and should be read in
conjunction with the related sections of each Prospectus.
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As used in this Statement of Additional Information, with respect to those
Funds and policies for which they apply, the terms "Municipal Obligations" and
"tax-exempt securities" have the meanings given to them in the relevant Fund's
Prospectus. For descriptions of the securities ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch
Investors Service, Inc. ("Fitch"), see Appendix B. For a general discussion of
special investment considerations relating to investing in (i) New York and
(ii) California Municipal Obligations, see Appendices C and D, respectively.
The management style used for the Funds emphasizes several key factors.
Portfolio managers consider the security quality that is, the ability of the
debt issuer to make timely payments of principal and interest. Also important
in the analysis is the relationship of a bond's yield and its maturity, in
which the managers evaluate the risks of investing in long-term higher-yielding
securities. Managers also use a computer model to simulate possible
fluctuations in prices and yields if interest rates change. Another step in the
analysis is comparing yields on different types of securities to determine
relative risk/reward profiles.
U.S. Government Securities. U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and
U.S. Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow
any amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the
agency or instrumentality. Agencies and instrumentalities of the U.S.
Government include but are not limited to: Federal Land Banks, Federal
Financing Banks, Banks for Cooperatives, Federal Intermediate Credit Banks,
Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, Student Loan Marketing
Association, United States Postal Service, Chrysler Corporate Loan Guarantee
Board, Small Business Administration, Tennessee Valley Authority and any other
enterprise established or sponsored by the U.S. Government. Certain U.S.
Government Securities, including U.S. Treasury bills, notes and bonds,
Government National Mortgage Association certificates and Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other U.S. Government Securities are issued or guaranteed by
federal agencies or government sponsored enterprises and are not supported by
the full faith and credit of the United States. These securities include
obligations that are supported by the right of the issuer to borrow from the
U.S. Treasury, such as obligations of Federal Home Loan Banks, and obligations
that are supported by the creditworthiness of the particular instrumentality,
such as obligations of the Federal National Mortgage Association or Federal
Home Loan Mortgage Corporation. Vista Federal Money Market Fund generally
limits its investments in agency and instrumentality obligations to obligations
the interest on which is generally not subject to state and local income taxes
by reason of federal law. Agencies and instrumentalities issuing such
obligations include the Farm Credit System Financial Assistance Corporation,
the Federal Financing Bank, The General Services Administration, Federal Home
Loan Banks, the Tennessee Valley Authority and the Student Loan Marketing
Association. For a description of certain obligations issued or guaranteed by
U.S. Government agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of
government-backed instruments. However, such specialized instruments may only
be available from a few sources, in limited amounts, or only in very large
denominations; they may also require specialized capability in portfolio
servicing and in legal matters related to government guarantees. While they may
frequently offer attractive yields, the limited-activity markets of many of
these securities means that, if a Fund were required to liquidate any of them,
it might not be able to do so advantageously; accordingly, each Fund investing
in such securities intends normally to hold such securities to maturity or
pursuant to repurchase agreements, and would treat such securities
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(including repurchase agreements maturing in more than seven days) as illiquid
for purposes of its limitation on investment in illiquid securities.
Bank Obligations. Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings and Loan Insurance Fund of the
Federal Deposit Insurance Corporation, and foreign banks (including their U.S.
branches) having total assets in excess of $10 billion (or the equivalent in
other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of United States banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. Fixed time deposits subject to withdrawal penalties
and with respect to which a Fund cannot realize the proceeds thereon within
seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation. Investors should also be aware that
securities of foreign banks and foreign branches of United States banks may
involve foreign investment risks in addition to those relating to domestic bank
obligations.
Commercial Paper and Other Short-Term Obligations. The commercial paper
and other short-term obligations of U.S. and foreign corporations which may be
purchased by the Vista Prime Money Market Fund and the Vista Cash Management
Fund, other than those of bank holding companies, include obligations which are
(i) rated Prime-1 by Moody's, A-1 by S&P, or F-1 by Fitch, or comparably rated
by another NRO; or (ii) determined by the advisers to be of comparable quality
to those rated obligations which may be purchased by the Vista Prime Money
Market Fund and the Vista Cash Management Fund at the date of purchase or which
at the date of purchase have an outstanding debt issue rated in the highest
rating category by Moody's, S&P, Fitch or another NRO. The commercial paper and
other short-term obligations of U.S. banks holding companies which may be
purchased by the Vista Prime Money Market Fund and the Vista Cash Management
Fund include obligations issued or guaranteed by bank holding companies with
total assets exceeding $1 billion. For purposes of the size standards with
respect to banks and bank holding companies, "total deposits" and "total
assets" are determined on an annual basis by reference to an institution's then
most recent annual financial statements.
Repurchase Agreements. A Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers believed
creditworthy, and only if fully collateralized by securities in which such Fund
is permitted to invest. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying debt instrument for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument and the Fund to resell the instrument
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at a fixed price and time, thereby determining the yield during the Fund's
holding period. This procedure results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to
the risk that the seller may fail to repurchase the security. Repurchase
agreements are considered under the 1940 Act to be loans collateralized by the
underlying securities. All repurchase agreements entered into by a Fund will be
fully collateralized at all times during the period of the agreement in that
the value of the underlying security will be at least equal to 100% of the
amount of the loan, including the accrued interest thereon, and the Fund or its
custodian or sub-custodian will have possession of the collateral, which the
Board of Trustees believes will give it a valid, perfected security interest in
the collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been conclusively established. This
might become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities would not be
owned by a Fund, but would only constitute collateral for the seller's
obligation to pay the repurchase price. Therefore, a Fund may suffer time
delays and incur costs in connection with the disposition of the collateral.
The Board of Trustees believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than
would be the case with securities owned by a Fund. Repurchase agreements will
give rise to income which will not qualify as tax-exempt income when
distributed by a Tax Free Fund. Repurchase agreements maturing in more than
seven days are treated as illiquid for purposes of the Funds' restrictions on
purchases of illiquid securities. Repurchase agreements are also subject to the
risks described below with respect to stand-by commitments.
Reverse Repurchase Agreements. Reverse repurchase agreements involve sales
of portfolio securities of a Fund to member banks of the Federal Reserve System
or securities dealers believed creditworthy, concurrently with an agreement by
such Fund to repurchase the same securities at a later date at a fixed price
which is generally equal to the original sales price plus interest. A Fund
retains record ownership and the right to receive interest and principal
payments on the portfolio security involved.
High Quality Municipal Obligations. Investments by the Tax Free Money
Market Funds will be made in unrated Municipal Obligations only if they are
determined to be of comparable quality to permissable rated investments on the
basis of the advisers' credit evaluation of the obligor or of the bank issuing
a participation certificate, letter of credit or guaranty, or insurance issued
in support of the obligation. High Quality instruments may produce a lower
yield than would be available from less highly rated instruments. The Board of
Trustees has determined that Municipal Obligations which are backed by the
credit of the U.S. Government will be considered to have a rating equivalent to
Moody's Aaa.
If, subsequent to purchase by a Tax Free Money Market Fund, (a) an issue
of rated Municipal Obligations ceases to be rated in the highest short-term
rating category (the two highest categories in the case of the New York and
California Tax Free Money Market Funds) by at least two rating organizations
(or one rating organization if the instrument was rated by only one such
organization) or the Board of Trustees determines that it is no longer of
comparable quality or (b) a Money Market Fund's advisers become aware that any
portfolio security not so highly rated or any unrated security has been given a
rating by any rating organization below the rating organization's second
highest rating category, the Board of Trustees will reassess promptly whether
such security presents minimal credit risk and will cause such Money Market
Fund to take such action as it determines is in its best interest and that of
its shareholders; provided that the reassessment required by clause (b) is not
required if the portfolio security is disposed of or matures within five
business days of the advisers becoming aware of the new rating and the Fund's
Board is subsequently notified of the adviser's actions.
To the extent that a rating given by Moody's, S&P or Fitch for Municipal
Obligations may change as a result of changes in such organizations or their
rating systems, the Funds will attempt to use comparable ratings as standards
for their investments in accordance with the investment policies contained in
the Prospectuses and this Statement of Additional Information. The ratings of
Moody's, S&P and Fitch represent their opinions as to the quality of the
Municipal Obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although
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these ratings may be an initial criterion for selection of portfolio
investments, the advisers also will evaluate these securities and the
creditworthiness of the issuers of such securities.
Forward Commitments. In order to invest a Fund's assets immediately, while
awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will
normally be purchased. Although, with respect to any Tax Free Fund, short-term
investments will normally be in tax-exempt securities or Municipal Obligations,
short-term taxable securities or obligations may be purchased if suitable
short-term tax-exempt securities or Municipal Obligations are not available.
When a commitment to purchase a security on a forward commitment basis is made,
procedures are established consistent with the General Statement of Policy of
the Securities and Exchange Commission concerning such purchases. Since that
policy currently recommends that an amount of the respective Fund's assets
equal to the amount of the purchase be held aside or segregated to be used to
pay for the commitment, a separate account of such Fund consisting of cash,
cash equivalents or high quality debt securities equal to the amount of such
Fund's commitments will be established at such Fund's custodian bank. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market value. If the market value of
such securities declines, additional cash, cash equivalents or highly liquid
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the respective Fund.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Fund's
portfolio are subject to changes in value based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Purchasing securities on a forward commitment basis
can involve the risk that the yields available in the market when the delivery
takes place may actually be higher or lower than those obtained in the
transaction itself. On the settlement date of the forward commitment
transaction, the respective Fund will meet its obligations from then available
cash flow, sale of securities held in the separate account, sale of other
securities or, although it would not normally expect to do so, from sale of the
forward commitment securities themselves (which may have a value greater or
lesser than such Fund's payment obligations). The sale of securities to meet
such obligations may result in the realization of capital gains or losses,
which, for consideration by investors in the Tax Free Funds, are not exempt
from federal, state or local taxation.
To the extent a Fund engages in forward commitment transactions, it will
do so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.
Illiquid Securities. For purposes of its limitation on investments in
illiquid securities, each Fund may elect to treat as liquid, in accordance with
procedures established by the Board of Trustees, certain investments in
restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act ("Section 4(2) paper"). Rule
144A provides an exemption from the registration requirements of the Securities
Act for the resale of certain restricted securities to qualified institutional
buyers. Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as a
Fund who agree that they are purchasing the paper for investment and not with a
view to public distribution. Any resale of Section 4(2) paper by the purchaser
must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A and
Section 4(2) paper are liquid or illiquid for purposes of the limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
the Trustees
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have delegated to the advisers the determination as to whether a particular
instrument is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of trades and quotes for the security, the
number of dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the nature of
the security and the time needed to dispose of the security. The Trustees will
periodically review the Funds' purchases and sales of Rule 144A securities and
Section 4(2) paper.
Stand-by Commitments. When a Fund purchases securities it may also acquire
stand-by commitments with respect to such securities. Under a stand-by
commitment, a bank, broker-dealer or other financial institution agrees to
purchase at a Fund's option a specified security at a specified price.
The amount payable to a Money Market Fund upon its exercise of a stand-by
commitment with respect to a Municipal Obligation normally would be (i) the
acquisition cost of the Municipal Obligation (excluding any accrued interest
paid by the Fund on the acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Fund
owned the security, plus (ii) all interest accrued on the security since the
last interest payment date during the period the security was owned by the
Fund. Absent unusual circumstances relating to a change in market value, a
Money Market Fund would value the underlying Municipal Obligation at amortized
cost. Accordingly, the amount payable by a bank or dealer during the time a
stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation. The Money Market Funds
value stand-by commitments at zero for purposes of computing their net asset
value per share.
The stand-by commitments that may be entered into by the Funds are subject
to certain risks, which include the ability of the issuer of the commitment to
pay for the securities at the time the commitment is exercised, the fact that
the commitment is not marketable by a Fund, and that the maturity of the
underlying security will generally be different from that of the commitment.
Not more than 10% of the total assets of a Money Market Fund will be invested
in Municipal Obligations that are subject to stand-by commitments from the same
bank or broker-dealer.
Floating and Variable Rate Securities; Participation
Certificates. Floating and variable rate demand instruments permit the holder
to demand payment upon a specified number of days' notice of the unpaid
principal balance plus accrued interest either from the issuer or by drawing on
a bank letter of credit, a guarantee or insurance issued with respect to such
instrument. Investments by the Income Funds in floating or variable rate
securities normally will involve industrial development or revenue bonds that
provide for a periodic adjustment in the interest rate paid on the obligation
and may, but need not, permit the holder to demand payment as described above.
While there is usually no established secondary market for issues of these
types of securities, the dealer that sells an issue of such security frequently
will also offer to repurchase the securities at any time at a repurchase price
which varies and may be more or less than the amount the holder paid for them.
The floating or variable rate demand instruments in which the Money Market
Funds may invest are payable on demand on not more than seven calendar days'
notice.
The terms of these types of securities provide that interest rates are
adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term rates,
such as Treasury Bills or LIBOR (London Interbank Offered Rate), as provided in
the respective instruments. The Funds will decide which floating or variable
rate securities to purchase in accordance with procedures prescribed by Board
of Trustees of the Trust in order to minimize credit risks.
In the case of a Money Market Fund, the Board of Trustees may determine
that an unrated floating or variable rate security meets the Fund's high
quality criteria if it is backed by a letter of credit or guarantee or is
insured by an insurer that meets such quality criteria, or on the basis of a
credit evaluation of the underlying obligor. If the credit of the obligor is of
"high quality", no credit support from a bank or other financial institution
will be necessary. The Board of Trustees will re-evaluate each unrated floating
or variable rate security on a quarterly basis to determine that it continues
to meet a Money Market Fund's high quality criteria. If an instrument is ever
deemed to fall below a Money Market Fund's high quality standards, either it
will be sold in the market or the demand feature will be exercised.
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The securities in which certain Funds may be invested include
participation certificates, issued by a bank, insurance company or other
financial institution, in securities owned by such institutions or affiliated
organizations ("Participation Certificates"). A Participation Certificate gives
a Fund an undivided interest in the security in the proportion that the Fund's
participation interest bears to the total principal amount of the security and
generally provides the demand feature described below. Each Participation
Certificate is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the Participation Certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Trustees of the Trust has determined meets the prescribed quality
standards for a particular Fund.
A Fund may have the right to sell the Participation Certificate back to
the institution and draw on the letter of credit or insurance on demand after
the prescribed notice period, for all or any part of the full principal amount
of the Fund's participation interest in the security, plus accrued interest.
The institutions issuing the Participation Certificates would retain a service
and letter of credit fee and a fee for providing the demand feature, in an
amount equal to the excess of the interest paid on the instruments over the
negotiated yield at which the Participation Certificates were purchased by a
Fund. The total fees would generally range from 5% to 15% of the applicable
prime rate or other short-term rate index. With respect to insurance, a Fund
will attempt to have the issuer of the Participation Certificate bear the cost
of any such insurance, although the Funds retain the option to purchase
insurance if deemed appropriate. Obligations that have a demand feature
permitting a Fund to tender the obligation to a foreign bank may involve
certain risks associated with foreign investment. A Fund's ability to receive
payment in such circumstances under the demand feature from such foreign banks
may involve certain risks such as future political and economic developments,
the possible establishments of laws or restrictions that might adversely affect
the payment of the bank's obligations under the demand feature and the
difficulty of obtaining or enforcing a judgment against the bank.
The advisers have been instructed by the Board of Trustees to monitor on
an ongoing basis the pricing, quality and liquidity of the floating and
variable rate securities held by the Funds, including Participation
Certificates, on the basis of published financial information and reports of
the rating agencies and other bank analytical services to which the Funds may
subscribe. Although these instruments may be sold by a Fund, it is intended
that they be held until maturity. Participation Certificates will only be
purchased by a Tax Free Fund if, in the opinion of counsel to the issuer,
interest income on such instruments will be tax-exempt when distributed as
dividends to shareholders of such Fund.
Past periods of high inflation, together with the fiscal measures adopted
to attempt to deal with it, have seen wide fluctuations in interest rates,
particularly "prime rates" charged by banks. While the value of the underlying
floating or variable rate securities may change with changes in interest rates
generally, the floating or variable rate nature of the underlying floating or
variable rate securities should minimize changes in value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed rate securities. A Fund's portfolio may
contain floating or variable rate securities on which stated minimum or maximum
rates, or maximum rates set by state law, limit the degree to which interest on
such floating or variable rate securities may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the floating
or variable rate securities is made in relation to movements of the applicable
banks' "prime rates" or other short-term rate adjustment indices, the floating
or variable rate securities are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the floating or variable rate
securities may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar maturities.
The maturity of variable rate securities is deemed to be the longer of (i)
the notice period required before a Fund is entitled to receive payment of the
principal amount of the security upon demand or (ii) the period remaining until
the security's next interest rate adjustment. With respect to a Money Market
Fund, the maturity of a variable rate demand instrument will be determined in
the same manner for purposes of computing the Fund's dollar-weighted average
portfolio maturity. With respect to the Income Funds, if vari-
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able rate securities are not redeemed through the demand feature, they mature
on a specified date which may range up to thirty years from the date of
issuance.
Tender Option Floating or Variable Rate Certificates. The Money Market
Funds may invest in tender option bonds. A tender option bond is a synthetic
floating or variable rate security issued when long term bonds are purchased in
the secondary market and are then deposited into a trust. Custodial receipts
are then issued to investors, such as the Funds, evidencing ownership interests
in the trust. The trust sets a floating or variable rate on a daily or weekly
basis which is established through a remarketing agent. These types of
instruments, to be money market eligible under Rule 2a-7, must have a liquidity
facility in place which provides additional comfort to the investors in case
the remarketing fails. The sponsor of the trust keeps the difference between
the rate on the long term bond and the rate on the short term floating or
variable rate security.
Supranational Obligations. Supranational organizations include
organizations such as The World Bank, which was chartered to finance
development projects in developing member countries; the European Community,
which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union
of various European nations steel and coal industries; and the Asian
Development Bank, which is an international development bank established to
lend funds, promote investment and provide technical assistance to member
nations of the Asian and Pacific regions.
Securities Loans. To the extent specified in its Prospectus, each Fund is
permitted to lend its securities to broker-dealers and other institutional
investors in order to generate additional income. Such loans of portfolio
securities may not exceed 30% of the value of a Fund's total assets. In
connection with such loans, a Fund will receive collateral consisting of cash,
cash equivalents, U.S. Government securities or irrevocable letters of credit
issued by financial institutions. Such collateral will be maintained at all
times in an amount equal to at least 100% of the current market value plus
accrued interest of the securities loaned. A Fund can increase its income
through the investment of such collateral. A Fund continues to be entitled to
the interest payable or any dividend-equivalent payments received on a loaned
security and, in addition, to receive interest on the amount of the loan.
However, the receipt of any dividend-equivalent payments by a Fund on a loaned
security from the borrower will not qualify for the dividends-received
deduction. Such loans will be terminable at any time upon specified notice. A
Fund might experience risk of loss if the institutions with which it has
engaged in portfolio loan transactions breach their agreements with such Fund.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delays in receiving additional collateral or in the
recovery of the securities or the possible loss of rights in the collateral
should the borrower experience financial difficulty. Loans will be made only to
firms deemed by the advisers to be of good standing and will not be made
unless, in the judgment of the advisers, the consideration to be earned from
such loans justifies the risk.
Zero Coupon and Stripped Obligations. The principal and interest
components of United States Treasury bonds with remaining maturities of longer
than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are separately
issued by the United States Treasury at the request of depository financial
institutions, which then trade the component parts separately. The interest
component of STRIPS may be more volatile than that of United States Treasury
bills with comparable maturities.
Zero coupon obligations are sold at a substantial discount from their
value at maturity and, when held to maturity, their entire return, which
consists of the amortization of discount, comes from the difference between
their purchase price and maturity value. Because interest on a zero coupon
obligation is not distributed on a current basis, the obligation tends to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying securities with similar maturities. The value
of zero coupon obligations appreciates more than such ordinary interest-paying
securities during periods of declining interest rates and depreciates more than
such ordinary interest-paying securities during periods of rising
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interest rates. Under the stripped bond rules of the Internal Revenue Code of
1986, as amended, investments in zero coupon obligations will result in the
accrual of interest income on such investments in advance of the receipt of the
cash corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the coupon
payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Treasury Investment Growth Receipts and generic Treasury Receipts,
are examples of stripped U.S. Treasury securities separated into their
component parts through such custodial arrangements.
Additional Policies Regarding Derivative and Related Transactions
Introduction. As explained more fully below, the Income Funds may employ
derivative and related instruments as tools in the management of portfolio
assets. Put briefly, a "derivative" instrument may be considered a security or
other instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts, structured
notes and various other over-the-counter instruments.
Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways:
First, to reduce risk by hedging (offsetting) an investment position. Second,
to substitute for another security particularly where it is quicker, easier and
less expensive to invest in derivatives. Lastly, to speculate or enhance
portfolio performance. When used prudently, derivatives can offer several
benefits, including easier and more effective hedging, lower transaction costs,
quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for a Fund.
Each Income Fund may invest its assets in derivative and related
instruments subject only to the Fund's investment objective and policies and
the requirement that the Fund maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to
avoid leveraging the Fund.
The value of some derivative or similar instruments in which the Income
Funds invest may be particularly sensitive to changes in prevailing interest
rates or other economic factors, and like other investments of the Funds the
ability of a Fund to successfully utilize these instruments may depend in part
upon the ability of the advisers to forecast interest rates and other economic
factors correctly. If the advisers accurately forecast such factors and has
taken positions in derivative or similar instruments contrary to prevailing
market trends, the Funds could be exposed to the risk of a loss. The Funds
might not employ any or all of the strategies described herein, and no
assurance can be given that any strategy used will succeed.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Funds may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Funds' current prospectuses as well as provide useful information to
prospective investors.
Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. An incorrect correlation could result
in a loss on both the hedged assets in a Fund and the hedging vehicle so that
the portfolio return might have been greater had hedging not been attempted.
The advisers may accurately forecast interest rates, market values or other
economic factors in utilizing a derivatives strategy. In such a case, the Fund
may have been in a better position had it not entered into such strategy.
Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains. Strategies not involving
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hedging may increase the risk to a Fund. Certain strategies, such as yield
enhancement, can have speculative characteristics and may result in more risk
to a Fund than hedging strategies using the same instruments. There can be no
assurance that a liquid market will exist at a time when a Fund seeks to close
out an option, futures contract or other derivative or related position. Many
exchanges and boards of trade limit the amount of fluctuation permitted in
option or futures contract prices during a single day; once the daily limit has
been reached on particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain instruments are relatively new and
without a significant trading history. As a result, there is no assurance that
an active secondary market will develop or continue to exist. Finally,
over-the-counter instruments typically do not have a liquid market. Lack of a
liquid market for any reason may prevent a Fund from liquidating an unfavorable
position. Activities of large traders in the futures and securities markets
involving arbitrage, "program trading," and other investment strategies may
cause price distortions in these markets. In certain instances, particularly
those involving over-the-counter transactions, forward contracts there is a
greater potential that a counterparty or broker may default or be unable to
perform on its commitments. In the event of such a default, a Fund may
experience a loss.
Specific Uses and Strategies. Set forth below are explanations various
strategies involving derivatives and related instruments which may be used by
the Income Funds.
Options on Securities and Securities Indexes. The Funds may PURCHASE, SELL
or EXERCISE call and put options on (i) securities, (ii) securities indexes,
and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the Funds
may also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party
contracts with price and other terms negotiated between buyer and seller. As
such, over-the-counter options generally have much less market liquidity and
carry the risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities a Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. A Fund may also use
combinations of options to minimize costs, gain exposure to markets or take
advantage of price disparities or market movements. For example, a Fund may
sell put or call options it has previously purchased or purchase put or call
options it has previously sold. These transactions may result in a net gain or
loss depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option which is
sold. A Fund may write a call or put option in order to earn the related
premium from such transactions. Prior to exercise or expiration, an option may
be closed out by an offsetting purchase or sale of a similar option.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
fund writing a covered call (i.e., where the underlying securities are held by
the fund) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. The
Funds will not write uncovered options.
If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, such Fund
will lose its entire investment in the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less
than the price of the related security. There can be no assurance that a liquid
market will exist when a Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.
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Futures Contracts and Options on Futures Contracts. The Funds may purchase
or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Funds may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
a Fund may sell a futures contract or buy a futures option to protect against a
decline in value, or reduce the duration, of portfolio holdings. Likewise,
these instruments may be used where a Fund intends to acquire an instrument or
enter into a position. For example, a Fund may purchase a futures contract or
buy a futures option to gain immediate exposure in a market or otherwise offset
increases in the purchase price of securities or currencies to be acquired in
the future. Futures options may also be written to earn the related premiums.
When writing or purchasing options, the Funds may simultaneously enter
into other transactions involving futures contracts or futures options in order
to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. Funds may engage in cross-hedging by purchasing or selling
futures or options on a security different from the security position being
hedged to take advantage of relationships between the two securities.
Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Funds will
only enter into futures contracts or options on futures contracts which are
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system.
Forward Contracts. A Fund may also use forward contracts to hedge against
changes in interest-rates, increase exposure to a market or otherwise take
advantage of such changes. An interest-rate forward contract involves the
obligation to purchase or sell a specific debt instrument at a fixed price at a
future date.
Interest Rate Transactions. The Income Funds may employ interest rate
management techniques, including transactions in options (including yield curve
options), futures, options on futures, forward exchange contracts, and interest
rate swaps.
An Income Fund will only enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Income Fund receiving or
paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets
or principal. Accordingly, the risk of loss with respect to interest rate swaps
is limited to the net amount of interest payments that an Income Fund is
contractually obligated to make. If the other party to and interest rate swap
defaults, an Income Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest
rate swaps are individually negotiated, each Income Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate swap position.
An Income Fund may enter into interest rate swaps to the maximum allowed
limits under applicable law. An Income Fund will typically use interest rate
swaps to shorten the effective duration of its portfolio. Interest rate swaps
involve the exchange by an Income Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments.
Structured Products. The Income Funds may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the
issuance by that entity of one or more classes of securities ("structured
products") backed by, or representing interests in, the underlying instruments.
The cash flow on the underlying instruments may be apportioned among the newly
issued structured products to create
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securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured products is dependent on the
extent of the cash flow on the underlying instruments. A Fund may invest in
structured products which represent derived investment positions based on
relationships among different markets or asset classes.
The Income Funds may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the cost of
Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase
in the coupon rate. A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between
the prices or interest rates, as the case may be, of the respective securities.
When an Income Fund invests in notes linked to the price of an underlying
instrument, the price of the underlying security is determined by a multiple
(based on a formula) of the price of such underlying security. A structured
product may be considered to be leveraged to the extent its interest rate
varies by a magnitude that exceeds the magnitude of the change in the index
rate of interest. Because they are linked to their underlying markets or
securities, investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security.
Total return on the structured product is derived by linking return to one or
more characteristics of the underlying instrument. Because certain structured
products of the type in which the Income Fund anticipates it will invest may
involve no credit enhancement, the credit risk of those structured products
generally would be equivalent to that of the underlying instruments. An Income
Fund is permitted to invest in a class of structured products that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured products typically have higher yields and present
greater risks than unsubordinated structured products. Although an Income
Fund's purchase of subordinated structured products would have similar economic
effect to that of borrowing against the underlying securities, the purchase
will not be deemed to be leverage for purposes of an Income Fund's fundamental
investment limitation related to borrowing and leverage.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, an Income Fund's
investments in these structured products may be limited by the restrictions
contained in the 1940 Act. Structured products are typically sold in private
placement transactions, and there currently is no active trading market for
structured products. As a result, certain structured products in which the
Income Funds invest may be deemed illiquid and subject to their limitation on
illiquid investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
Additional Restrictions on the Use of Futures and Option Contracts. None
of the Funds is a "commodity pool" (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC and futures contracts and futures options
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that a Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5%
of the liquidation value of the Fund's portfolio, provided, further, that, in
the case of an option that is in-the-money, the in-the-money amount may be
excluded in calculating the 5% limitation.
When an Income Fund purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with such Fund's custodian so that the
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amount so segregated, plus the initial deposit and variation margin held in the
account of its broker, will at all times equal the value of the futures
contract, thereby insuring that the use of such futures is unleveraged.
The Income Funds' ability to engage in the transactions described herein
may be limited by the current federal income tax requirement that a Fund derive
less than 30% of its gross income from the sale or other disposition of
securities held for less than three months.
In addition to the foregoing requirements, the Board of Trustees has
adopted an additional restriction on the use of futures contracts and options
thereon, requiring that the aggregate market value of the futures contracts
held by an Income Fund not exceed 50% of the market value of its total assets.
Neither this restriction nor any policy with respect to the above-referenced
restrictions, would be changed by the Board of Trustees without considering the
policies and concerns of the various federal and state regulatory agencies.
Investment Restrictions
The Funds have adopted the following investment restrictions which may not
be changed without approval by a "majority of the outstanding shares" of a Fund
which, as used in this Statement of Additional Information, means the vote of
the lesser of (i) 67% or more of the shares of a Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of a Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of a
Fund.
Each Fund may not:
(1) borrow money, except that each Fund may borrow money for
temporary or emergency purposes, or by engaging in reverse repurchase
transactions, in an amount not exceeding 33-1/3% of the value of its total
assets at the time when the loan is made and may pledge, mortgage or
hypothecate no more than 1/3 of its net assets to secure such borrowings.
Any borrowings representing more than 5% of a Fund's total assets must be
repaid before the Fund may make additional investments;
(2) make loans, except that each Fund may: (i) purchase and hold debt
instruments (including without limitation, bonds, notes, debentures or
other obligations and certificates of deposit, bankers' acceptances and
fixed time deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect to portfolio
securities; and (iii) lend portfolio securities with a value not in excess
of one-third of the value of its total assets;
(3) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Fund's total assets would be invested in the
securities of companies whose principal business activities are in the
same industry. Notwithstanding the foregoing, (i) with respect to a Fund's
permissible futures and options transactions in U.S. Government
securities, positions in options and futures shall not be subject to this
restriction; (ii) the Money Market Funds may invest more than 25% of their
total assets in obligations issued by banks, including U. S. banks; (iii)
New York Tax Free Money Market Fund, California Tax Free Money Market Fund
and Tax Free Money Market Fund may invest more than 25% of their
respective assets in municipal obligations secured by bank letters of
credit or guarantees, including participation certificates and (iv) more
than 25% of the assets of California Intermediate Tax Free Income Fund may
be invested in municipal obligations secured by bank letters of credit or
guarantees;
(4) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments but this shall not prevent
a Fund from (i) purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities or (ii) engaging in forward purchases or sales of foreign
currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
Investments by a Fund
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<PAGE>
in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby
precluded;
(6) issue any senior security (as defined in the 1940 Act), except
that (a) a Fund may engage in transactions that may result in the issuance
of senior securities to the extent permitted under applicable regulations
and interpretations of the 1940 Act or an exemptive order; (b) a Fund may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth above, a Fund may borrow money as authorized by the
1940 Act. For purposes of this restriction, collateral arrangements with
respect to a Fund's permissible options and futures transactions,
including deposits of initial and variation margin, are not considered to
be the issuance of a senior security; or
(7) underwrite securities issued by other persons except insofar as a
Fund may technically be deemed to be an underwriter under the Securities
Act of 1933 in selling a portfolio security. In addition, as a matter of
fundamental policy, notwithstanding any other investment policy or
restriction, a Fund may seek to achieve its investment objective by
investing all of its investable assets in another investment company
having substantially the same investment objective and policies as the
Fund. For purposes of investment restriction (5) above, real estate
includes Real Estate Limited Partnerships. For purposes of investment
restriction (3) above, industrial development bonds, where the payment of
principal and interest is the ultimate responsibility of companies within
the same industry, are grouped together as an "industry." Investment
restriction (3) above, however, is not applicable to investments by a Fund
in municipal obligations where the issuer is regarded as a state, city,
municipality or other public authority since such entities are not members
of any "industry." Supranational organizations are collectively considered
to be members of a single "industry" for purposes of restriction (3)
above.
In addition, each Fund is subject to the following nonfundamental
investment restrictions which may be changed without shareholder approval:
(1) Each Fund other than the Tax Free Funds may not, with respect to
75% of its assets, hold more than 10% of the outstanding voting securities
of any issuer or invest more than 5% of its assets in the securities of
any one issuer (other than obligations of the U.S. Government, its
agencies and instrumentalities); each Tax Free Fund may not, with respect
to 50% of its assets, hold more than 10% of the outstanding voting
securities of any issuer.
(2) Each Fund may not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program
of a Fund.
(3) Each Fund may not purchase or sell interests in oil, gas or
mineral leases.
(4) Each Income Fund may not invest more than 15% of its net assets
in illiquid securities; each Money Market Fund may not invest more than
10% of its net assets in illiquid securities.
(5) Each Fund may not write, purchase or sell any put or call option
or any combination thereof, provided that this shall not prevent (i) the
writing, purchasing or selling of puts, calls or combinations thereof with
respect to portfolio securities or (ii) with respect to a Fund's
permissible futures and options transactions, the writing, purchasing,
ownership, holding or selling of futures and options positions or of puts,
calls or combinations thereof with respect to futures.
(6) Each Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of
the securities of any one investment company or invest more than 10% of
its total assets in the securities of other investment companies. It is
the Trust's position that proprietary strips, such as CATS and TIGRS, are
United States Government securities. How-
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ever, the Trust has been advised that the staff of the Securities and
Exchange Commission's Division of Investment Management does not consider
these to be United States Government securities, as defined under the 1940
Act.
For purposes of the Funds' investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
In order to permit the sale of its shares in certain states, a Fund may
make commitments more restrictive that the investment policies and limitations
described above and in its Prospectus. Should a Fund determine that any such
commitment is no longer in its best interests, it will revoke the commitment by
terminating sales of its shares in the state involved.
In order to comply with certain regulatory policies, as a matter of
operating policy, each Fund will not invest for the purpose of exercising
control or management.
As a nonfundamental operating policy, the Money Market Funds will not
invest more than 25% of their respective total assets in obligations issued by
foreign banks (other than foreign branches of U.S. banks).
As a nonfundamental operating policy, the Tax Free Money Market Funds will
not invest in obligations secured by letters of credit or guarantees from
foreign banks (other than foreign branches of U.S. banks) if, after giving
effect to such investment, the value attributable to such letters of credit or
guarantees, as determined by the respective Funds' advisers, would exceed 25%
of the respective Funds' total assets.
If a percentage or rating restriction on investment or use of assets set
forth herein or in a Prospectus is adhered to at the time, later changes in
percentage or ratings resulting from any cause other than actions by a Fund
will not be considered a violation. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
Portfolio Transactions and Brokerage Allocation
Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of the adviser or sub-adviser to such Fund
and who is appointed and supervised by senior officers of such adviser or
sub-adviser. Changes in the Funds' investments are reviewed by the Board of
Trustees. The Funds' portfolio managers may serve other clients of the advisers
in a similar capacity. Money market instruments are generally purchased in
principal transactions; thus, the Money Market Funds generally pay no brokerage
commissions.
The frequency of an Income Fund's portfolio transactions the portfolio
turnover rate will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the advisers will weigh the added costs of
short-term investment against anticipated gains. Each Income Fund will engage
in portfolio trading if its advisers believe a transaction, net of costs
(including custodian charges), will help it achieve its investment objective.
For the fiscal year ended August 31, 1996, and the fiscal year ended
August 31, 1997, the annual rates of portfolio turnover for the following Funds
were as follows:
The Tax Free Income Fund: 210% and ___%, respectively; The New York Tax
Free Income Fund: 156% and ___%, respectively.
For the fiscal year ended August 31, 1996, and the fiscal year ended
August 31, 1997, the California Intermediate Tax Free Income Fund had portfolio
turnover rates of 188% and ___%, respectively.
Under the advisory agreement and the sub-advisory agreements, the adviser
and sub-advisers shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result
17
<PAGE>
in total costs or proceeds being the most favorable to the Funds. In assessing
the best overall terms available for any transaction, the adviser and
sub-advisers consider all factors they deem relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, research services provided to
the adviser or sub-advisers, and the reasonableness of the commissions, if any,
both for the specific transaction and on a continuing basis. The adviser and
sub-advisers are not required to obtain the lowest commission or the best net
price for any Fund on any particular transaction, and are not required to
execute any order in a fashion either preferential to any Fund relative to
other accounts they manage or otherwise materially adverse to such other
accounts.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the adviser or
sub-adviser to a Fund normally seeks to deal directly with the primary market
makers unless, in its opinion, best execution is available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the adviser or sub-adviser on the
tender of a Fund's portfolio securities in so-called tender or exchange offers.
Such soliciting dealer fees are in effect recaptured for the Funds by the
adviser and sub-advisers. At present, no other recapture arrangements are in
effect.
Under the advisory and sub-advisory agreements and as permitted by Section
28(e) of the Securities Exchange Act of 1934, the adviser or sub-advisers may
cause the Funds to pay a broker-dealer which provides brokerage and research
services to the adviser or sub-advisers, the Funds and/or other accounts for
which they exercise investment discretion an amount of commission for effecting
a securities transaction for the Funds in excess of the amount other
broker-dealers would have charged for the transaction if they determine in good
faith that the total commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer viewed
in terms of either that particular transaction or their overall
responsibilities to accounts over which they exercise investment discretion.
Not all of such services are useful or of value in advising the Funds. The
adviser and sub-advisers report to the Board of Trustees regarding overall
commissions paid by the Funds and their reasonableness in relation to the
benefits to the Funds. The term "brokerage and research services" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or of
purchasers or sellers of securities, furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts, and effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
The management fees that the Funds pay to the adviser will not be reduced
as a consequence of the adviser's or sub-advisers' receipt of brokerage and
research services. To the extent the Funds' portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Funds will exceed
those that might otherwise be paid by an amount which cannot be presently
determined. Such services would be useful and of value to the adviser or
sub-advisers in serving one or more of their other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the adviser and sub-advisers in carrying out their
obligations to the Funds. While such services are not expected to reduce the
expenses of the adviser or sub-advisers, they would, through use of the
services, avoid the additional expenses which would be incurred if they should
attempt to develop comparable information through their own staff.
In certain instances, there may be securities that are suitable for one or
more of the Funds as well as one or more of the adviser's or sub-advisers'
other clients. Investment decisions for the Funds and for other clients are
made with a view to achieving their respective investment objectives. It may
develop that the same investment decision is made for more than one client or
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives
of more than
18
<PAGE>
one client. In executing portfolio transactions for a Fund, the adviser or
sub-advisers may, to the extent permitted by applicable laws and regulations,
but shall not be obligated to, aggregate the securities to be sold or purchased
with those of other Funds or their other clients if, in the adviser's or
sub-advisers' reasonable judgment, such aggregation (i) will result in an
overall economic benefit to the Fund, taking into consideration the
advantageous selling or purchase price, brokerage commission and other
expenses, and trading requirements, and (ii) is not inconsistent with the
policies set forth in the Trust's registration statement and the Fund's
Prospectus and Statement of Additional Information. In such event, the adviser
or a sub- adviser will allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in an equitable manner, consistent with
its fiduciary obligations to the Fund and such other clients. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as a Fund is concerned. However, it is believed
that the ability of the Funds to participate in volume transactions will
generally produce better executions for the Funds.
PERFORMANCE INFORMATION
From time to time, a Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. Because such performance information is based
on past investment results, it should not be considered as an indication or
representation of the performance of any classes of a Fund in the future. From
time to time, the performance and yield of classes of a Fund may be quoted and
compared to those of other mutual funds with similar investment objectives,
unmanaged investment accounts, including savings accounts, or other similar
products and to stock or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of a Fund or its
classes may be compared to data prepared by Lipper Analytical Services, Inc. or
Morningstar Mutual Funds on Disc, widely recognized independent services which
monitor the performance of mutual funds. Performance and yield data as reported
in national financial publications including, but not limited to, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in local or regional publications, may also be used in comparing the
performance and yield of a Fund or its classes. A Fund's performance may be
compared with indices such as the Lehman Brothers Government/Corporate Bond
Index, the Lehman Brothers Government Bond Index, the Lehman Government Bond
1-3 Year Index and the Lehman Aggregate Bond Index; the S&P 500 Index, the Dow
Jones Industrial Average or any other commonly quoted index of common stock
prices; and the Russell 2000 Index and the NASDAQ Composite Index.
Additionally, a Fund may, with proper authorization, reprint articles written
about such Fund and provide them to prospective shareholders.
A Fund may provide period and average annual "total rates of return." The
"total rate of return" refers to the change in the value of an investment in a
Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. For
Class A shares, the average annual total rate of return figures will assume
payment of the maximum initial sales load at the time of purchase. For Class B
and Class C shares, the average annual total rate of return figures will assume
deduction of the applicable contingent deferred sales charge imposed on a total
redemption of shares held for the period. One-, five-, and ten-year periods
will be shown, unless the class has been in existence for a shorter-period.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the yields and the net asset values (in the case of
the Income Funds) of the classes of shares of a Fund will vary based on market
conditions, the current market value of the securities held by a Fund and
changes in the Fund's expenses. The advisers, Shareholder Servicing Agents, the
Administrator, the Distributor and other service providers may voluntarily
waive a portion of their fees on a month-to-month basis. In addition, the
Distributor may assume a portion of a Fund's operating expenses on a
month-to-month basis. These actions would have the effect of increasing the net
income (and therefore the yield and total rate of return) of the classes of
shares of a Fund during the period such waivers are in effect. These factors
and possible
19
<PAGE>
differences in the methods used to calculate the yields and total rates of
return should be considered when comparing the yields or total rates of return
of the classes of shares of a Fund to yields and total rates of return
published for other investment companies and other investment vehicles
(including different classes of shares). The Trust is advised that certain
Shareholder Servicing Agents may credit to the accounts of their customers from
whom they are already receiving other fees amounts not exceeding the
Shareholder Servicing Agent fees received, which will have the effect of
increasing the net return on the investment of customers of those Shareholder
Servicing Agents. Such customers may be able to obtain through their
Shareholder Servicing Agents quotations reflecting such increased return.
In connection with the Hanover Reorganization, the Vista 100% U.S.
Treasury Securities Money Market Fund was established to receive the assets of
The 100% U.S. Treasury Securities Money Market Fund of Hanover, and the Vista
Cash Management Fund (formerly known as the Vista Global Money Market Fund),
which received the assets of The Cash Management Fund of Hanover, adopted the
financial history of The Cash Management Fund of Hanover. Performance results
presented for each class of the Vista 100% U.S. Treasury Securities Money
Market Fund and the Vista Cash Management Fund will be based upon the
performance of The 100% U.S. Treasury Securities Money Market Fund and The Cash
Management Fund of Hanover, respectively, for periods prior to the consummation
of the Hanover Reorganization.
Advertising or communications to shareholders may contain the views of the
advisers as to current market, economic, trade and interest rate trends, as
well as legislative, regulatory and monetary developments, and may include
investment strategies and related matters believed to be of relevance to a
Fund.
Advertisements for the Vista funds may include references to the asset
size of other financial products made available by Chase, such as the offshore
assets of other funds.
Total Rate of Return
A Fund's or class's total rate of return for any period will be calculated
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains declared during such period
with respect to a share held at the beginning of such period and with respect
to shares purchased with such dividends and capital gains distributions, by
(ii) the public offering price per share on the first day of such period, and
(b) subtracting 1 from the result. The average annual rate of return quotation
will be calculated by (x) adding 1 to the period total rate of return quotation
as calculated above, (y) raising such sum to a power which is equal to 365
divided by the number of days in such period, and (z) subtracting 1 from the
result.
The average annual total rate of return figures for the Class A shares of
the following Funds, reflecting the initial investment and assuming the
reinvestment of all distributions (but excluding the effects of any applicable
sales charges) for the one and five year periods ended August 31, 1997, and for
the period from September 8, 1987 (commencement of business operations) to
August 31, 1997, were as follows:
The Tax Free Income Fund: ___%, ___% and ___%, respectively; The New York
Tax Free Income Fund: ___%, ___% and ___%, respectively.
With the current maximum sales charge for Class A shares of 4.50%
reflected, the average annual total rate of return figures for the same periods
would be as follows:
The Tax Free Income Fund: ___%, ___% and ___%, respectively; The New York
Tax Free Income Fund: ___%, ___% and ___%, respectively.
The average rate of total return for the California Intermediate Tax Free
Income Fund (excluding the effects of any applicable sales charges) for the one
year period ended August 31, 1997 and from the inception date of July 15, 1993
through August 31, 1997 were ___% and ___%, respectively. With the current
maximum sales charge of 4.50% reflected, the average annual total rate of
return for the same periods would be ___% and ___%, respectively.
The average annual total rate of return figures for the Class B shares of
the following Funds, reflecting the initial investment and assuming the
reinvestment of all distributions for the one year period ended August 31,
1997, and for the period from commencement of business operations on November
4, 1993 to August 31, 1997 were as follows:
20
<PAGE>
The Tax Free Income Fund: ___% and ___%, respectively. The New York Tax
Free Income Fund: ___% and ___%, respectively.
The Funds may also from time to time include in advertisements or other
communications a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
a Fund with other measures of investment return.
Yield Quotations
Any current "yield" quotation for a class of shares of an Income Fund
shall consist of an annualized hypothetical yield, carried at least to the
nearest hundredth of one percent, based on a thirty calendar day period and
shall be calculated by (a) raising to the sixth power the sum of 1 plus the
quotient obtained by dividing the Fund's net investment income earned during
the period by the product of the average daily number of shares outstanding
during the period that were entitled to receive dividends and the maximum
offering price per share on the last day of the period, (b) subtracting 1 from
the result, and (c) multiplying the result by 2.
Any current "yield" for a class of shares of a Money Market Fund which is
used in such a manner as to be subject to the provisions of Rule 482(d) under
the Securities Act of 1933, as amended, shall consist of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a specific seven calendar day period and shall be calculated by
dividing the net change in the value of an account having a balance of one
Share at the beginning of the period by the value of the account at the
beginning of the period and multiplying the quotient by 365/7. For this
purpose, the net change in account value would reflect the value of additional
Shares purchased with dividends declared on the original Share and dividends
declared on both the original Share and any such additional Shares, but would
not reflect any realized gains or losses from the sale of securities or any
unrealized appreciation or depreciation on portfolio securities. In addition,
any effective yield quotation for a class of shares of a Money Market Fund so
used shall be calculated by compounding the current yield quotation for such
period by multiplying such quotation by 7/365, adding 1 to the product, raising
the sum to a power equal to 365/7, and subtracting 1 from the result. A portion
of a Tax Free Money Market Fund's income used in calculating such yields may be
taxable.
Any taxable equivalent yield quotation of a class of shares of a Tax Free
Fund, whether or not it is a Money Market Fund, shall be calculated as follows.
If the entire current yield quotation for such period is tax-exempt, the tax
equivalent yield will be the current yield quotation (as determined in
accordance with the appropriate calculation described above) divided by 1 minus
a stated income tax rate or rates. If a portion of the current yield quotation
is not tax-exempt, the tax equivalent yield will be the sum of (a) that portion
of the yield which is tax-exempt divided by 1 minus a stated income tax rate or
rates and (b) the portion of the yield which is not tax-exempt.
21
<PAGE>
Current Effective Compound
Annualized Yield Annualized Yield
as of 8/31/97 as of 8/31/97
------------------ --------------------
U. S. Government Money Market Fund
Vista Shares % %
Premier Shares % %
Institutional Shares % %
Prime Money Market Fund
B Shares % %
Premier Shares % %
Institutional Shares % %
Federal Money Market Fund
Vista Shares % %
Premier Shares % %
Institutional Shares % %
Treasury Plus Money Market Fund
Vista Shares % %
Premier Shares % %
Institutional Shares % %
100% U.S. Treasury Securities
Money Market Fund
Vista Shares % %
Premier Shares % %
Institutional Shares % %
Cash Management Fund
Vista Shares % %
Premier Shares % %
Institutional Shares % %
Current Effective Annualized
Annualized Compound Tax Equivalent
Yield Annualized Yield Yield**
as of 8/31/97 as of 8/31/97 as of 8/31/97
--------------- ------------------ ---------------
Tax Free Money Market Fund
Vista Shares % % %
Premier Shares % % %
Institutional Shares % % %
California Tax Free
Money Market Fund % % %
New York Tax Free
Money Market Fund % % %
22
<PAGE>
Thirty-Day Tax Equivalent
Yield Thirty-Day Yield**
as of 8/31/97 as of 8/31/97
--------------- -------------------
Tax Free Income Fund
Class A Shares % %
Class B Shares % %
New York Tax Free Income Fund
Class A Shares % %
Class B Shares % %
California Intermediate Tax Free
Income Fund % %
* The tax equivalent yields assume a federal income tax rate of 39.6% for the
Tax Free Money Market Fund and Tax Free Income Fund, a combined New York
State, New York City and federal income tax rate of 46.80% for the New York
Tax Free Money Market Fund and New York Tax Free Income Fund and a combined
California State and federal income tax rate of 46.24% for the California
Tax Free Money Market Fund and California Intermediate Tax Free Income Fund.
23
<PAGE>
Non-Standardized Performance Results
The table below reflects the net change in the value of an assumed initial
investment of $10,000 in the following Funds (excluding the effects of any
applicable sales charges) for the period from the commencement date of business
for each such Fund (i.e., either September 8, 1987 for the Tax Free Income and
New York Tax Free Income Funds or July 16, 1993 for the California Intermediate
Tax Free Income Fund.) The values reflect an assumption that capital gain
distributions and income dividends, if any, have been invested in additional
shares of the same class. From time to time, the Funds may provide these
performance results in addition to the total rate of return quotations required
by the Securities and Exchange Commission. As discussed more fully in the
Prospectuses, neither these performance results, nor total rate of return
quotations, should be considered as representative of the performance of the
Funds in the future. These factors and the possible differences in the methods
used to calculate performance results and total rates of return should be
considered when comparing such performance results and total rate of return
quotations of the Funds with those published for other investment companies and
other investment vehicles.
<TABLE>
<CAPTION>
Value of Value of Value of
Period Ended Initial $10,000 Capital Gains Reinvested Total
August 31, 1997 Investment Distribution Dividends Value
- ---------------------------- ----------------- --------------- ------------ --------
<S> <C> <C> <C> <C>
The Tax Free Income Fund:
A Shares $ $ $ $
B Shares
The New York Tax Free
Income Fund:
A Shares
B Shares
The California Intermediate
Tax Free
Income Fund
</TABLE>
With the current maximum sales charge of 4.50% for Class A shares, and the
currently applicable CDSC for Class B shares for each period length, reflected,
the figures for the same periods would be as follows:
<TABLE>
<CAPTION>
Value of Value of Value of
Period Ended Initial $10,000 Capital Gains Reinvested Total
August 31, 1997 Investment Distribution Dividends Value
- ---------------------------- ----------------- --------------- ------------ --------
<S> <C> <C> <C> <C>
The Tax Free Income Fund:
A Shares $ $ $ $
B Shares
The New York Tax Free
Income Fund:
A Shares
B Shares
The California Intermediate
Tax Free
Income Fund
</TABLE>
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New York
Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition,to
the days listed above (other than Good Friday), the Funds are closed for
business on the following holidays: Martin Luther King Day, Columbus Day, and
Veteran's Day.
24
<PAGE>
The Money Market Funds' portfolio securities are valued at their amortized
cost. Amortized cost valuation involves valuing an instrument at its cost and
thereafter accrediting discounts and amortizing premiums at a constant rate to
maturity. Pursuant to the rules of the Securities and Exchange Commission, the
Board of Trustees has established procedures to stabilize the net asset value
of each Money Market Fund at $1.00 per share. These procedures include a review
of the extent of any deviation of net asset value per share, based on available
market rates, from the $1.00 amortized cost price per share. If fluctuating
interest rates cause the market value of a Money Market Fund's portfolio to
approach a deviation of more than 1/2 of 1% from the value determined on the
basis of amortized cost, the Board of Trustees will consider what action, if
any, should be initiated. Such action may include redemption of shares in kind
(as described in greater detail below), selling portfolio securities prior to
maturity, reducing or withholding dividends and utilizing a net asset value per
share as determined by using available market quotations.
The Money Market Funds have established procedures designed to ensure that
their portfolio securities meet their high quality criteria.
Bonds and other fixed income securities (other than short-term
obligations) in a Fund's portfolio are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the Board
of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Short-
term obligations which mature in 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Board of Trustees. Futures
and option contracts that are traded on commodities or securities exchanges are
normally valued at the settlement price on the exchange on which they are
traded. Portfolio securities (other than short-term obligations) for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations in an Income Fund's portfolio is
determined on the basis of coupon interest accrued plus amortization of
discount (the difference between acquisition price and stated redemption price
at maturity) and premiums (the excess of purchase price over stated redemption
price at maturity). Interest income on short-term obligations is determined on
the basis of interest and discount accrued less amortization of premium.
PURCHASES, REDEMPTIONS AND EXCHANGES
The Fund has established certain procedures and restrictions, subject to
change from time to time, for purchase, redemption, and exchange orders,
including procedures for accepting telephone instructions and effecting
automatic investments and redemptions. The Funds' Transfer Agent may defer
acting on a shareholder's instructions until it has received them in proper
form. In addition, the privileges described in the Prospectuses are not
available until a completed and signed account application has been received by
the Transfer Agent. Telephone transaction privileges are made available to
shareholders automatically upon opening an account unless the privilege is
declined in Section 6 of the Account Application.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, a Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service
options chosen by the shareholder or joint shareholders in his or their latest
account application or other written request for services, including
purchasing, exchanging, or redeeming shares of such Fund and depositing and
withdrawing monies from the bank account specified in the Bank Account
Registration section of the shareholder's latest account application or as
otherwise properly specified to such Fund in writing.
Subject to compliance with applicable regulations, each Fund has reserved
the right to pay the redemption price of its Shares, either totally or
partially, by a distribution in kind of readily marketable portfolio
25
<PAGE>
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
Investors in Class A shares may qualify for reduced initial sales charges
by signing a statement of intention (the "Statement"). This enables the
investor to aggregate purchases of Class A shares in the Fund with purchases of
Class A shares of any other Fund in the Trust (or if a Fund has only one class,
shares of such Fund), excluding shares of any Vista money market fund, during a
13-month period. The sales charge is based on the total amount to be invested
in Class A shares during the 13-month period. All Class A or other qualifying
shares of these funds currently owned by the investor will be credited as
purchases (at their current offering prices on the date the Statement is
signed) toward completion of the Statement. A 90-day back-dating period can be
used to include earlier purchases at the investor's cost. The 13-month period
would then begin on the date of the first purchase during the 90-day period. No
retroactive adjustment will be made if purchases exceed the amount indicated in
the Statement. A shareholder must notify the Transfer Agent or Distributor
whenever a purchase is being made pursuant to a Statement.
The Statement is not a binding obligation on the investor to purchase the
full amount indicated; however, on the initial purchase, if required (or
subsequent purchases if necessary), 5% of the dollar amount specified in the
Statement will be held in escrow by the Transfer Agent in Class A shares (or if
a Fund has only one class and is subject to an initial sales charge, shares of
such Fund) registered in the shareholder's name in order to assure payment of
the proper sales charge. If total purchases pursuant to the Statement (less any
dispositions and exclusive of any distributions on such shares automatically
reinvested) are less than the amount specified, the investor will be requested
to remit to the Transfer Agent an amount equal to the difference between the
sales charge paid and the sales charge applicable to the aggregate purchases
actually made. If not remitted within 20 days after written request, an
appropriate number of escrowed shares will be redeemed in order to realize the
difference. This privilege is subject to modification or discontinuance at any
time with respect to all shares purchased thereunder. Reinvested dividend and
capital gain distributions are not counted toward satisfying the Statement.
Class A shares of a Fund may also be purchased by any person at a reduced
initial sales charge which is determined by (a) aggregating the dollar amount
of the new purchase and the greater of the purchaser's total (i) net asset
value or (ii) cost of any shares acquired and still held in the Fund, or any
other Vista fund excluding any Vista money market fund, and (b) applying the
initial sales charge applicable to such aggregate dollar value (the "Cumulative
Quantity Discount"). The privilege of the Cumulative Quality Discount is
subject to modification or discontinuance at any time with respect to all Class
A shares (or if a Fund has only one class and is subject to an initial sales
charge, shares of such Fund) purchased thereafter.
An individual who is a member of a qualified group (as hereinafter
defined) may also purchase Class A shares of a Fund (or if a Fund has only one
class and is subject to an initial sales charge, shares of such Fund) at the
reduced sales charge applicable to the group taken as a whole. The reduced
initial sales charge is based upon the aggregate dollar value of Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) previously purchased and still owned by the group plus the
securities currently being purchased and is determined as stated in the
preceding paragraph. In order to obtain such discount, the purchaser or
investment dealer must provide the Transfer Agent with sufficient information,
including the purchaser's total cost, at the time of purchase to permit
verification that the purchaser qualifies for a cumulative quantity discount,
and confirmation of the order is subject to such verification. Information
concerning the current initial sales charge applicable to a group may be
obtained by contacting the Transfer Agent.
A "qualified group" is one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Class A shares (or if a
Fund has only one class and is subject to an initial sales charge, shares of
such Fund) at a discount and (iii) satisfies uniform criteria which enables the
Distributor to realize
26
<PAGE>
economies of scale in its costs of distributing Class A shares (or if a Fund
has only one class and is subject to an initial sales charge, shares of such
Fund). A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
must agree to include sales and other materials related to the Fund in its
publications and mailings to members at reduced or no cost to the Distributor,
and must seek to arrange for payroll deduction or other bulk transmission of
investments in the Fund. This privilege is subject to modification or
discontinuance at any time with respect to all Class A shares (or if a Fund has
only one class and is subject to an initial sales charge, shares of such Fund)
purchased thereafter.
Under the Exchange Privilege, shares may be exchanged for shares of
another fund only if shares of the fund exchanged into are registered in the
state where the exchange is to be made. Shares of a Fund may only be exchanged
into another fund if the account registrations are identical. With respect to
exchanges from any Vista money market fund, shareholders must have acquired
their shares in such money market fund by exchange from one of the Vista
non-money market funds or the exchange will be done at relative net asset value
plus the appropriate sales charge. Any such exchange may create a gain or loss
to be recognized for federal income tax purposes. Normally, shares of the fund
to be acquired are purchased on the redemption date, but such purchase may be
delayed by either fund for up to five business days if a fund determines that
it would be disadvantaged by an immediate transfer of the proceeds.
The contingent deferred sales charge for Class B shares will be waived for
certain exchanges and for redemptions in connection with a Fund's systematic
withdrawal plan, subject to the conditions described in the Prospectuses. In
addition, subject to confirmation of a shareholder's status, the contingent
deferred sales charge will be waived for: (i) a total or partial redemption
made within one year of the shareholder's death or initial qualification for
Social Security disability payments; (ii) a redemption in connection with a
Minimum Required Distribution form an IRA, Keogh or custodial account under
section 403(b) of the Internal Revenue Code or a mandatory distribution from a
qualified plan; (iii) redemptions made from an IRA, Keogh or custodial account
under section 403(b) of the Internal Revenue Code through an established
Systematic Redemption Plan; (iv) a redemption resulting from an
over-contribution to an IRA; (v) distributions from a qualified plan upon
retirement; and (vi) an involuntary redemption of an account balance under
$500.
Class B shares automatically convert to Class A shares (and thus are then
subject to the lower expenses borne by Class A shares) after a period of time
specified below has elapsed since the date of purchase (the "CDSC Period"),
together with the pro rata portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares attributable to the
Class B shares then converting. The conversion of Class B shares purchased on
or after May 1, 1996, will be effected at the relative net asset values per
share of the two classes on the first business day of the month following the
eighth anniversary of the original purchase. The conversion of Class B shares
purchased prior to May 1, 1996, will be effected at the relative net asset
values per share of the two classes on the first business day of the month
following the seventh anniversary of the original purchase. If any exchanges of
Class B shares during the CDSC Period occurred, the holding period for the
shares exchanged will be counted toward the CDSC Period. At the time of the
conversion the net asset value per share of the Class A shares may be higher or
lower than the net asset value per share of the Class B shares; as a result,
depending on the relative net asset values per share, a shareholder may receive
fewer or more Class A shares than the number of Class B shares converted.
A Fund may require signature guarantees for changes that shareholders
request be made in Fund records with respect to their accounts, including but
not limited to, changes in bank accounts, for any written requests for
additional account services made after a shareholder has submitted an initial
account application to the Fund, and in certain other circumstances described
in the Prospectuses. A Fund may also refuse to accept or carry out any
transaction that does not satisfy any restrictions then in effect. A signature
guarantee may be obtained from a bank, trust company, broker-dealer or other
member of a national securities exchange. Please note that a notary public
cannot provide a signature guarantee.
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TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the respective Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussions here and in each Fund's Prospectus are not intended as substitutes
for careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As
a regulated investment company, each Fund is not subject to federal income tax
on the portion of its net investment income (i.e., its investment company
taxable income, as that term is defined in the Code, without a deduction for
dividends paid) and net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital losses) that it distributes to shareholders,
provided that it distributes at least 90% of its net investment income and at
least 90% of its tax-exempt income (net of expenses allocable thereto) for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the Code that are described below. Distributions by a Fund made
during the taxable year or, under specified circumstances, within twelve months
after the close of the taxable year, will be considered distributions of income
and gains of the taxable year and can therefore satisfy the Distribution
Requirement. Because certain Funds invest all of their assets in Portfolios
which will be classified as partnerships for federal income tax purposes, such
Funds will be deemed to own a proportionate share of the income of the
Portfolio into which each contributes all of its assets for purposes of
determining whether such Funds satisfy the Distribution Requirement and the
other requirements necessary to qualify as a regulated investment company
(e.g., Income Requirement (hereinafter defined), etc.).
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities)
and other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and for taxable
years beginning on or before August 5, 1997 (2) derive less than 30% of its
gross income (exclusive of certain gains on designated hedging transactions
that are offset by realized or unrealized losses on offsetting positions) from
the sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three months
(the "Short-Short Gain Test"). For purposes of these calculations, gross income
includes tax-exempt income. However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). The Short-Short gain test has been repealed for taxable years
beginning after August 5, 1997.
In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including a municipal obligation) purchased
by a Fund at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Fund held the debt
obligation.
Further, the Code also treats as ordinary income, a portion of the capital
gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
such Fund and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
Section 1092 of the Code; (3) the transaction is one that was marketed or sold
to such Fund on the basis that it would have the economic characteristics of a
loan but the interest-like return would be taxed as capital gain; or (4) the
transaction is described as a conversion transaction in the Treasury Regu-
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lations. The amount of the gain recharacterized generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the federal long-term, mid-term, or
short-term rate, depending upon the type of instrument at issue, reduced by an
amount equal to: (1) prior inclusions of ordinary income items from the
conversion transaction; and (2) the capitalized interest on acquisition
indebtedness under Code Section 263(g). Built-in losses will be preserved where
a Fund has a built-in loss with respect to property that becomes a part of a
conversion transaction. No authority exists that indicates that the converted
character of the income will not be passed to a Fund's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or short-term,
the holding period of the asset may be affected if: (1) the asset is used to
close a "short sale" (which includes for certain purposes the acquisition of a
put option) or is substantially identical to another asset so used, (2) the
asset is otherwise held by the Fund as part of a "straddle" (which term
generally excludes a situation where the asset is stock and the Fund grants a
qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto); or (3) the asset is stock and the
Fund grants an in-the-money qualified covered call option with respect thereto.
In addition, a Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.
Transactions that may be engaged in by certain of the Funds (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment
as "Section 1256 contracts." Section 1256 contracts are treated as if they are
sold for their fair market value on the last business day of the taxable year,
even though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section
1256 contracts (including any capital gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is generally treated as 60% long-
term capital gain or loss and 40% short-term capital gain or loss. A Fund,
however, may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the
Fund that are not Section 1256 contracts.
A Fund may enter into notional principal contracts, including interest
rate swaps, caps, floors and collars. Under Treasury Regulations, in general,
the net income or deduction from a notional principal contract for a taxable
year is included in or deducted from gross income for that taxable year. The
net income or deduction from a notional principal contract for a taxable year
equals the total of all of the periodic payments (generally, payments that are
payable or receivable at fixed periodic intervals of one year or less during
the entire term of the contract) that are recognized from that contract for the
taxable year and all of the non-periodic payments (including premiums for caps,
floors and collars) that are recognized from that contract for the taxable
year. No portion of a payment by a party to a notional principal contract is
recognized prior to the first year to which any portion of a payment by the
counterparty relates. A periodic payment is recognized ratably over the period
to which it relates. In general, a non-periodic payment must be recognized over
the term of the notional principal contract in a manner that reflects the
economic substance of the contract. A non-periodic payment that relates to an
interest rate swap, cap, floor or collar shall be recognized over the term of
the contract by allocating it in accordance with the values of a series of
cash-settled forward or option contracts that reflect the specified index and
notional principal amount upon which the notional principal contract is based
under an alternative method contained in the proposed regulations.
Under recently enacted legislation, a Fund must generally recognize gain
(but not loss) upon entering into a "constructive sale" of an appreciated
financial position. A constructive sale of an appreciated financial position is
generally: (1) a short sale of, (2) an offsetting notional principal contract
with respect to, or (3) a
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<PAGE>
forward or futures contract to deliver, the same or substantially identical
property. In the case of such a transaction, a Fund will be treated as having
entered into the constructive sale when it acquires the related long position.
To the extent provided in regulations, a constructive sale will occur if a Fund
enters into one or more transactions that have substantially the same effect as
the above-described transactions. The legislation contains certain exceptions
from constructive sale treatment, including an exception for any position which
is marked-to-market under any other provision of the Code. When a constructive
sale occurs, a Fund will recognize gain as if the position were sold at its
fair market value on the date of the constructive sale and immediately
repurchased. The basis of the property is adjusted and a new holding period
begins on the date of the constructive sale. Constructive sale treatment does
not apply to a transaction that is closed within 30 days after the end of the
taxable year during which the transaction is entered into. However, if the
transaction is closed during the last 90 days of this period, then the
exception will only apply if the Fund holds the appreciated financial position
(without reducing the risk of loss with respect thereto) throughout the 60-day
period following the closing of the transaction.
In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the
value of its total assets may be invested in the securities of any one issuer
(other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security not the issuer of the option. However, with regard to
forward currency contracts, there does not appear to be any formal or informal
authority which identifies the issuer of such instrument. For purposes of asset
diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation,
a Federal Home Loan Bank, the Federal Home Loan Mortgage Association, the
Government National Mortgage Corporation, and the Student Loan Marketing
Association are treated as U.S. Government Securities.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98%
of ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year
election"))(Tax-exempt interest on municipal obligations is not subject to the
excise tax). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its
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taxable year if it has made a taxable year election) in determining the amount
of ordinary taxable income for the current calendar year (and, instead, include
such gains and losses in determining ordinary taxable income for the succeeding
calendar year).
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to shareholders as ordinary income and treated as dividends for federal
income tax purposes, but they will not qualify for the 70% dividends-received
deduction for corporate shareholders of a Fund. Dividends paid on Class A,
Class B and Class C shares are calculated at the same time. In general,
dividends on Class B and Class C shares are expected to be lower than those on
Class A shares due to the higher distribution expenses borne by the Class B and
Class C shares. Dividends may also differ between classes as a result of
differences in other class specific expenses.
A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
Under recently enacted legislation, the maximum rate of tax on long-term
capital gains of individuals will generally be reduced from 28% to 20% (10% for
gains otherwise taxed at 15%) for long-term capital gains realized after July
28, 1997 with respect to capital assets held for more than 18 months.
Additionally, beginning after December 31, 2000, the maximum tax rate for
capital assets with a holding period beginning after that date and held for
more than five years will be 18%. Under a literal reading of the legislation,
capital gain dividends paid by a regulated investment company would not appear
eligible for the reduced capital gain rates. However, the legislation
authorizes the Treasury Department to promulgate regulations that would apply
the new rates to capital gain dividends paid by a regulated investment company.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Each Tax Free Fund intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax Free
Fund's taxable year at least 50% of the its total assets consists of tax-exempt
municipal obligations. Distributions from a Tax Free Fund will constitute
exempt-interest dividends to the extent of its tax-exempt interest income (net
of expenses and amortized bond premium). Exempt-interest dividends distributed
to shareholders of a Tax Free Fund are excluded from gross income for federal
income tax purposes. However, shareholders required to file a federal income
tax return will be required to report the receipt of exempt-interest dividends
on their returns. Moreover, while exempt-interest dividends are excluded from
gross income for federal income tax purposes, they may be subject to
alternative minimum tax ("AMT") in certain circumstances and may have other
collateral tax consequences as discussed below. Distributions by a Tax Free
Fund of any investment company taxable income or of any net capital gain will
be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess
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of the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. In addition, under the Superfund Amendments and Reauthorization Act of
1986, a tax is imposed for taxable years beginning after 1986 and before 1996
at the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for this tax and the AMT net operating loss
deduction) over $2 million. Exempt-interest dividends derived from certain
"private activity" municipal obligations issued after August 7, 1986 will
generally constitute an item of tax preference includable in AMTI for both
corporate and noncorporate taxpayers. In addition, exempt-interest dividends
derived from all municipal obligations, regardless of the date of issue, must
be included in adjusted current earnings, which are used in computing an
additional corporate preference item (i.e., 75% of the excess of a corporate
taxpayer's adjusted current earnings over its AMTI (determined without regard
to this item and the AMT net operating loss deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must
be included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of a Tax Free Fund is denied a deduction for
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund. Moreover, a shareholder who is (or is related to) a "substantial
user" of a facility financed by industrial development bonds held by a Tax Free
Fund will likely be subject to tax on dividends paid by the Tax Free Fund which
are derived from interest on such bonds. Receipt of exempt-interest dividends
may result in other collateral federal income tax consequences to certain
taxpayers, including financial institutions, property and casualty insurance
companies and foreign corporations engaged in a trade or business in the United
States. Prospective investors should consult their own tax advisers as to such
consequences.
Net investment income that may be received by certain of the Funds from
sources within foreign countries may be subject to foreign taxes withheld at
the source. The United States has entered into tax treaties with many foreign
countries which entitle any such Fund to a reduced rate of, or exemption from,
taxes on such income. The investment yield of the Fund will be reduced by those
foreign taxes. It is impossible to determine the effective rate of foreign tax
in advance since the amount of any such Fund's assets to be invested in various
countries is not known.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis
in his shares; any excess will be treated as gain from the sale of his shares,
as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date. In addition, if the net asset
value at the time a shareholder purchases shares of a Fund reflects
undistributed net investment income or recognized capital gain net income, or
unrealized appreciation in the value of the assets of the Fund, distributions
of such amounts will be taxable to the shareholder in the manner described
above, although such distributions economically constitute a return of capital
to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation
or other "exempt recipient."
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Sale or Redemption of Shares
Each Money Market Fund seeks to maintain a stable net asset value of $1.00
per share; however, there can be no assurance that a Money Market Fund will do
this. In such a case and any case involving the Income Funds, a shareholder
will recognize gain or loss on the sale or redemption of shares of a Fund in an
amount equal to the difference between the proceeds of the sale or redemption
and the shareholder's adjusted tax basis in the shares. All or a portion of any
loss so recognized may be disallowed if the shareholder purchases other shares
of the Fund within 30 days before or after the sale or redemption. In general,
any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. However, any capital loss arising from the sale or redemption of shares
held for six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) (discussed above
in connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of shares. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a Fund,
(2) disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales
load pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in
determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Although the Funds generally retains the right to pay the redemption price
of shares in kind with securities (instead of cash) the Trust has filed an
election under Rule 18f-1 of the Investment Company Act of 1940, as amended
(the "1940 Act"), committing to pay in cash all redemptions by a shareholder of
record up to the amounts specified in the rule (approximately $250,000).
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, paid to a foreign shareholder
from net investment income will be subject to U.S. withholding tax at the rate
of 30% (or lower treaty rate) upon the gross amount of the dividend. Such a
foreign shareholder would generally be exempt from U.S. federal income tax on
gains realized on the sale of shares of the Fund, capital gain dividends and
exempt-interest dividends and amounts retained by the Fund that are designated
as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
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Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in
effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation
described above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in a Fund.
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MANAGEMENT OF THE TRUST AND THE FUNDS
Trustees and Officers
The Trustees and of the Trust officers and their principal occupations for
at least the past five years are set forth below. Their titles may have varied
during that period.
Fergus Reid, III--Chairman of the Trust. Chairman and Chief Executive
Officer, Lumelite Corporation, since September 1985; Trustee, Morgan Stanley
Funds. Age: 65. Address: 202 June Road, Stamford, CT 06903.
*H. Richard Vartabedian--Trustee and President of the Trust. Investment
Management Consultant; formerly, Senior Investment Officer, Division Executive
of the Investment Management Division of The Chase Manhattan Bank, N.A.,
1980-1991. Age: 61. Address: P.O. Box 296, Beach Road, Hendrick's Head,
Southport, ME 04576.
William J. Armstrong--Trustee. Vice President and Treasurer,
Ingersoll-Rand Company. Age: 55. Address: 49 Aspen Way, Upper Saddle River, NJ
07458.
John R.H. Blum--Trustee. Attorney in private practice; formerly a Partner
in the law firm of Richards, O'Neil & Allegaert; Commissioner of Agriculture
State of Connecticut, 1992-1995. Age: 68. Address: 322 Main Street,
Lakeville,CT 06039.
Stuart W. Cragin, Jr.--Trustee. Retired; formerly President, Fairfield
Testing Laboratory, Inc. He has previously served in a variety of marketing,
manufacturing and general management positions with Union Camp Corp., Trinity
Paper & Plastics Corp., and Conover Industries. Age: 64. Address: 108 Valley
Road, Cos Cob, CT 06807.
Roland R. Eppley, Jr.--Trustee. Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.; formerly Director of The Hanover Funds, Inc.
Age: 65. Address: 105 Coventry Place, Palm Beach Gardens, FL 33418.
Joseph J. Harkins--Trustee. Retired; Commercial Sector Executive and
Executive Vice President of The Chase Manhattan Bank, N.A. from 1985 through
1989. He has been employed by Chase in numerous capacities and offices from
1954 through 1989. Director of Blessings Corporation, Jefferson Insurance
Company of New York, Monticello Insurance Company and National. Age: 65.
Address: 257 Plantation Circle South, Ponte Vedra Beach, FL 32082.
*Sarah E. Jones--Trustee. President and Chief Operating Officer of Chase
Mutual Funds Corp.; formerly Managing Director for the Global Asset Management
and Private Banking Division of the Chase Manhattan Bank. Age: 46. Address: 101
Park Avenue, Suite 15, New York, New York 10178.
W.D. MacCallan--Trustee. Director of The Adams Express Co. and Petroleum &
Resources Corp.; formerly Chairman of the Board and Chief Executive Officer of
The Adams Express Co. and Petroleum & Resources Corp.; Director of The Hanover
Funds, Inc. and The Hanover Investment Funds, Inc. Age: 70. Address: 624 East
45th Street, Savannah, GA 31405.
W. Perry Neff--Trustee. Independent Financial Consultant; Director of
North America Life Assurance Co., Petroleum & Resources Corp. and The Adams
Express Co.; formerly Director and Chairman of The Hanover Funds, Inc.;
formerly Director, Chairman and President of The Hanover Investment Funds, Inc.
Age: 70. Address: RR 1 Box 102, Weston, VT 05181.
*Leonard M. Spalding, Jr.--Trustee. Chief Executive Officer of Chase
Mutual Funds Corp.; formerly President and Chief Executive Officer of Vista
Capital Management; and formerly Chief Investment Executive of the Chase
Manhattan Private Bank. Age: 62. Address: 101 Park Avenue, Suite 15, New York,
New York 10178.
Richard E. Ten Haken--Trustee; Chairman of the Audit Committee. Formerly
District Superintendent of Schools, Monroe No. 2 and Orleans Counties, New
York; Chairman of the Board and President, New York State Teachers' Retirement
System. Age: 63. Address: 4 Barnfield Road, Pittsford, NY 14534.
35
<PAGE>
Irving L. Thode--Trustee. Retired; formerly Vice President of Quotron
Systems. He has previously served in a number of executive positions with
Control Data Corp., including President of its Latin American Operations, and
General Manager of its Data Services business. Age: 66. Address: 80 Perkins
Road, Greenwich, CT 06830.
Martin R. Dean--Treasurer. Associate Director, Accounting Services, BISYS
Fund Services; formerly Senior Manager, KPMG Peat Marwick (1987-1994). Age: 33.
Address: 3435 Stelzer Road, Columbus, OH 43219.
W. Anthony Turner--Secretary. Senior Vice President and Regional Client
Executive, BISYS Fund Services; formerly Senior Vice President, First Union
Brokerage Services, Inc. and Senior Vice President, NationsBank. Age: 36.
Address: 125 West 55th Street, New York, NY 10019.
- ----------
* Asterisks indicate those Trustees that are "interested persons" (as defined
in the 1940 Act). Mr. Reid is not an interested person of the Trust's
investment advisers or principal underwriter, but may be deemed an
interested person of the Trust solely by reason of being chairman of the
Trust.
The Board of Trustees of the Trust presently has an Audit Committee. The
members of the Audit Committee are Messrs. Ten Haken (Chairman), Armstrong,
Eppley, MacCallan and Thode. The function of the Audit Committee is to
recommend independent auditors and monitor accounting and financial matters.
The Audit Committee met two times during the fiscal period ended August 31,
1997.
The Board of Trustees of the Trust has established an Investment
Committee. The members of the Investment Committee are Messrs. Vartabedian
(Chairman), Reid and Spalding. The function of the Investment Committee is to
review the investment management process of the Trust.
The Trustees and officers of the Trust appearing in the table above also
serve in the same capacities with respect to Mutual Fund Group, Mutual Fund
Variable Annuity Trust, Mutual Fund Select Group, Mutual Fund Select Trust,
Capital Growth Portfolio, Growth and Income Portfolio, International Equity
Portfolio and New Growth Opportunities Portfolio (these entities, together with
the Trust, are referred to below as the "Vista Funds").
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the advisers is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the advisers. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component.
36
<PAGE>
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended August 31, 1997 for each Trustee of the Trust:
<TABLE>
<CAPTION>
U.S. New York California
Government Tax Free Prime Tax Free Tax Free
Money Cash Money Money Money Money
Market Management Market Market Market Market
Fund Fund Fund Fund Fund Fund
------------ ------------ ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, $ $ $ $ $ $
Trustee
H. Richard Vartabedian,
Trustee
William J. Armstrong,
Trustee
John R.H. Blum,
Trustee
Stuart W. Cragin,
Jr., Trustee
Roland R. Eppley, Jr.,
Trustee
Joseph J. Harkins,
Trustee
Sarah E. Jones, Trustee
W.D. MacCallan,
Trustee
W. Perry Neff, Trustee
Leonard M. Spalding, Jr.,
Trustee
Richard E. Ten Haken,
Trustee
Irving L. Thode,
Trustee
</TABLE>
<TABLE>
<CAPTION>
California 100% U.S.
Treasury Intermediate Treasury
Federal Plus New York Tax Free Tax Free Securities
Money Money Tax Free Income Income Money Market
Market Fund Market Fund Income Fund Fund Fund Fund
------------- ------------- ------------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, $ $ $ $ $ $
Trustee
H. Richard
Vartabedian, Trustee
William J.
Armstrong, Trustee
John R.H. Blum,
Trustee
Stuart W. Cragin, Jr.
Trustee
Roland R. Eppley, Jr.
Trustee
Joseph J. Harkins,
Trustee
Sarah E. Jones, Trustee
W.D. MacCallan,
Trustee
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
California 100% U.S.
Treasury Intermediate Treasury
Federal Plus New York Tax Free Tax Free Securities
Money Money Tax Free Income Income Money Market
Market Fund Market Fund Income Fund Fund Fund Fund
------------- ------------- ------------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Perry Neff, $ $ $ $ $ $
Trustee
Leonard M. Spalding, Jr.,
Trustee
Richard E. Ten Haken,
Trustee
Irving L. Thode,
Trustee
</TABLE>
Pension or Total
Retirement Compensation
Benefits Accrued From
as Fund Expenses (1) "Fund Complex" (2)
---------------------- -------------------
Fergus Reid, III, Trustee $ $
H. Richard Vartabedian, Trustee
William J. Armstrong, Trustee
John R.H. Blum, Trustee
Stuart W. Cragin, Jr., Trustee
Roland R. Eppley, Jr., Trustee
Joseph J. Harkins, Trustee
Sarah E. Jones, Trustee
W.D. MacCallan, Trustee
W. Perry Neff, Trustee
Leonard M. Spalding, Jr., Trustee
Richard E. Ten Haken, Trustee
Irving L. Thode, Trustee
- ----------
(1) Data reflects total benefits accrued by Mutual Fund Group, Capital Growth
Portfolio, Growth and Income Portfolio and International Equity Portfolio
for the fiscal year ended October 31, 1997 and by the Trust and Mutual
Fund Variable Annuity Trust for the fiscal year ended August 31, 1997.
(2) Data reflects total compensation earned during the period January 1, 1997
to December 31, 1997 for service as a Trustee to all Funds advised by the
adviser.
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not
an employee of any of the Funds, the advisers, administrator or distributor or
any of their affiliates) may be entitled to certain benefits upon retirement
from the Board of Trustees. Pursuant to the Plan, the normal retirement date is
the date on which the eligible Trustee has attained age 65 and has completed at
least five years of continuous service with one or more of the investment
companies advised by the adviser (collectively, the "Covered Funds"). Each
Eligible Trustee is entitled to receive from the Covered Funds an annual
benefit commencing on the first day of the calendar quarter coincident with or
following his date of retirement equal to the sum of (i) 8% of the highest
annual compensation received from the Covered Funds multiplied by the number of
such Trustee's years of service (not in excess of 10 years) completed with
respect to any of the Covered Funds and (ii) 4% of the highest annual
compensation received from the Covered Funds for each year of Service in excess
of 10 years, provided that no Trustee's annual benefit will exceed the highest
annual compensation received by that Trustee from the Covered Funds. Such
benefit is payable to each eligible Trustee in monthly installments for the
life of the Trustee.
38
<PAGE>
Set forth below in the table are the estimated annual benefits payable to
an eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of October 31, 1997, the estimated credited years
of service for Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian,
Cragin, Thode, Neff, Eppley, MacCallan and Spalding and Ms. Jones are 12, 12,
9, 12, 6, 5, 4, 4, 12, 8, 7, 0 and 0, respectively.
Highest Annual Compensation Paid by All Vista Funds
---------------------------------------------------------
$60,000 $70,000 $80,000 $90,000 $100,000
Years of
Service Estimated Annual Benefits Upon Retirement
- --------- ---------------------------------------------------------
14 $57,600 $67,200 $76,800 $86,400 $ 96,000
12 52,800 61,600 70,400 79,200 88,000
10 48,000 56,000 64,000 72,000 80,000
8 38,400 44,800 51,200 57,600 64,000
6 28,800 38,600 38,400 43,200 48,000
4 19,200 22,400 25,600 28,800 32,000
Effective August 21, 1995, the Trustees instituted a Deferred Compensation
Plan for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which
each Trustee (who is not an employee of any of the Funds, the advisers,
administrator or distributor or any of their affiliates) may enter into
agreements with the Funds whereby payment of the Trustee's fees are deferred
until the payment date elected by the Trustee (or the Trustee's termination of
service). The deferred amounts are invested in shares of Vista funds selected
by the Trustee. The deferred amounts are paid out in a lump sum or over a
period of several years as elected by the Trustee at the time of deferral. If a
deferring Trustee dies prior to the distribution of amounts held in the
deferral account, the balance of the deferral account will be distributed to
the Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death.
Messrs. Eppley, Ten Haken, Thode and Vartabedian have each executed a
deferred compensation agreement for the 1997 calendar year and as of October
31, 1997 they had contributed $ , $ , $ and $ ,
respectively.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or
with respect to any matter unless it is finally adjudicated that they did not
act in good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving
the settlement or other disposition, or by a reasonable determination based
upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that
such officers or Trustees have not engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.
As of October 31, 1997, the Trustees and officers as a group owned less
than % of each Fund's outstanding shares, all of which were acquired for
investment purposes. For the fiscal year ended August 31, 1997, the Trust paid
its disinterested Trustees fees and expenses for all the meetings of the Board
and any committees attended in the aggregate amount of approximately $
which amount was then apportioned between the funds comprising the Trust.
Adviser and Sub-Advisers
Chase acts as investment adviser to the Funds pursuant to an Investment
Advisory Agreement, dated as of May 6, 1996 (the "Advisory Agreement"). Subject
to such policies as the Board of Trustees may determine, Chase is responsible
for investment decisions for the Funds. Pursuant to the terms of the Advisory
Agreement, Chase provides the Funds with such investment advice and supervision
as it deems necessary for the proper supervision of the Funds' investments. The
advisers continuously provide investment programs and determine
39
<PAGE>
from time to time what securities shall be purchased, sold or exchanged and
what portion of the Funds' assets shall be held uninvested. The advisers to the
Funds furnish, at their own expense, all services, facilities and personnel
necessary in connection with managing the investments and effecting portfolio
transactions for the Funds. The Advisory Agreement for the Funds will continue
in effect from year to year only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of a Fund's
outstanding voting securities and by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on such Advisory Agreement.
Under the Advisory Agreement, the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Funds
with greater opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the Advisory Agreement and the sub-advisers'
agreements with the adviser, the adviser and sub-advisers are permitted to
render services to others. Each advisory agreement is terminable without
penalty by the Trust on behalf of the Funds on not more than 60 days', nor less
than 30 days', written notice when authorized either by a majority vote of a
Fund's shareholders or by a vote of a majority of the Board of Trustees of the
Trust, or by the adviser or sub-adviser on not more than 60 days', nor less
than 30 days', written notice, and will automatically terminate in the event of
its "assignment" (as defined in the 1940 Act). The advisory agreements provide
that the adviser or sub-adviser under such agreement shall not be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio
transactions for the respective Fund, except for wilful misfeasance, bad faith
or gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder.
In the event the operating expenses of the Funds, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to the Funds imposed by the securities laws or regulations
thereunder of any state in which the shares of the Funds are qualified for
sale, as such limitations may be raised or lowered from time to time, the
adviser shall reduce its advisory fee (which fee is described below) to the
extent of its share of such excess expenses. The amount of any such reduction
to be borne by the adviser shall be deducted from the monthly advisory fee
otherwise payable with respect to the Funds during such fiscal year; and if
such amounts should exceed the monthly fee, the adviser shall pay to a Fund its
share of such excess expenses no later than the last day of the first month of
the next succeeding fiscal year.
Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that Chase may render services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser of the Fund and are under the common control of Chase as long as all
such persons are functioning as part of an organized group of persons, managed
by authorized officers of Chase.
Chase, on behalf of the Funds (other than the Cash Management Fund and the
Tax Free Money Market Fund), has entered into an investment sub-advisory
agreement dated as of May 6, 1996 with Chase Asset Management, Inc. ("CAM").
Texas Commerce Bank, National Association ("TCB") is the sub-investment adviser
to the Cash Management Fund and the Tax Free Money Market Fund pursuant to a
separate sub-investment advisory agreement between Chase and TCB dated as of
May 6, 1996. With respect to the day- to-day management of the Funds, under the
sub-advisory agreements, the sub-advisers make decisions concerning, and place
all orders for, purchases and sales of securities and help maintain the records
relating to such purchases and sales. The sub-advisers may, in their
discretion, provide such services through their own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of Chase; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the sub-adviser. This arrangement will not result in the
payment of additional fees by the Funds.
40
<PAGE>
Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range of
banking and investment services to customers throughout the United States and
around the world. Also included among the Chase accounts are commingled trust
funds and a broad spectrum of individual trust and investment management
portfolios. These accounts have varying investment objectives.
CAM is a wholly-owned operating subsidiary of the Adviser. CAM is
registered with the Securities and Exchange Commission as an investment adviser
and was formed for the purpose of providing discretionary investment advisory
services to institutional clients and to consolidate Chase's investment
management function, and the same individuals who serve as portfolio managers
for CAM also serve as portfolio managers for Chase.
TCB has been in the investment counselling business since 1987 and is
ultimately controlled and owned by Chase Manhattan Corporation. TCB renders
investment advice to a wide variety of corporations, pension plans,
foundations, trusts and individuals.
In consideration of the services provided by the adviser pursuant to the
Advisory Agreement, the adviser is entitled to receive from each Fund an
investment advisory fee computed daily and paid monthly based on a rate equal
to a percentage of such Fund's average daily net assets specified in the
relevant Prospectuses. However, the adviser may voluntarily agree to waive a
portion of the fees payable to it on a month-to-month basis. For its services
under its sub-advisory agreement, CAM (or TCB in the case of the Cash
Management Fund and the Tax Free Money Market Fund) will be entitled to receive
with respect to each such Fund, such compensation, payable by the adviser out
of its advisory fee, as is described in the relevent Prospectuses.
For the fiscal years ended August 31, 1995, August 31, 1996 and August 31,
1997, Chase was paid or accrued the following investment advisory fees with
respect to the following Funds, and voluntarily waived the amounts in
parentheses following such fees with respect to each such period:
<TABLE>
<CAPTION>
Fiscal Year- Fiscal Year- Fiscal Year-
Fund ended ended ended
- --------------------------------- 8/31/95 8/31/96 8/31/97
<S> <C> <C> <C>
Tax Free Money Market Fund:
Paid or Accrued $440,282 $ 602,984
Waived none none
New York Tax Free Money
Market Fund:
Paid or Accrued $381,647 $ 564,728
Waived
Tax Free Income Fund:
Paid or Accrued $307,093 $ 286,711
Waived ($287,095) ($ 222,662)
New York Tax Free Income Fund:
Paid or Accrued $333,493 $ 328,622
Waived ($219,772) ($ 105,922)
Federal Money Market Fund
Paid or Accrued $389,075 $ 590,313
Waived ($118,975) none
Treasury Plus Money Market Fund
Paid or Accrued $ 22,663 $ 665,556
Waived none none
Prime Money Market Fund
Paid or Accrued $352,679 $1,110,393
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year- Fiscal Year- Fiscal Year-
Fund ended ended ended
- --------------------------------- 8/31/95 8/31/96 8/31/97
<S> <C> <C> <C>
Waived $ 216,306 ($ 50,805)
California Intermediate
Tax Fee Income Fund
Paid or Accrued $ 102,004 $ 92,752
Waived ($ 102,004) ($ 90,335)
California Tax Free
Money Market Fund
Paid or Accrued $ 55,870 $ 48,544
Waived ($ 44,112) ($ 37,587)
U.S. Government
Money Market Fund
Paid or Accrued $1,440,186 $2,959,311
Waived none none
</TABLE>
For the period December 1, 1995 through August 31, 1996, Chase was paid or
accrued investment advisory fees and voluntarily waived the amount in
parentheses, $1,518,404 ($197,536), for the 100% U.S. Treasury Securities Money
Market Fund.
For the period December 1, 1995 through August 31, 1996, Chase was paid or
accrued investment advisory fees and voluntarily waived the amount in
parentheses, $1,781,610 ($195,420) for the Cash Management Fund.
42
<PAGE>
Administrator
Pursuant to an Administration Agreement (the "Administration Agreement"),
Chase serves as administrator of the Funds. Chase provides certain
administrative services to the Funds, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Funds' independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust with applicable laws and regulations
excluding those of the securities laws of various states; arranging for the
computation of performance data, including net asset value and yield;
responding to shareholder inquiries; and arranging for the maintenance of books
and records of the Funds and providing, at its own expense, office facilities,
equipment and personnel necessary to carry out its duties. Chase in its
capacity as administrator does not have any responsibility or authority for the
management of the Funds, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares.
Under the Administration Agreement Chase is permitted to render
administrative services to others. The Administration Agreement will continue
in effect from year to year with respect to each Fund only if such continuance
is specifically approved at least annually by the Board of Trustees or by vote
of a majority of such Fund's outstanding voting securities and, in either case,
by a majority of the Trustees who are not parties to the Administration
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Administration Agreement is terminable without penalty by the Trust
on behalf of each Fund on 60 days' written notice when authorized either by a
majority vote of such Fund's shareholders or by vote of a majority of the Board
of Trustees, including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, or by Chase on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Funds, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Administration Agreement.
In addition, the Administration Agreement provides that, in the event the
operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for
any fiscal year exceed the most restrictive expense limitation applicable to
that Fund imposed by the securities laws or regulations thereunder of any state
in which the shares of such Fund are qualified for sale, as such limitations
may be raised or lowered from time to time, Chase shall reduce its
administration fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by Chase
shall be deducted from the monthly administration fee otherwise payable to
Chase during such fiscal years; and if such amounts should exceed the monthly
fee, Chase shall pay to such Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Fund a fee computed daily
and paid monthly at an annual rate equal to 0.10% of each of the Fund's average
daily net assets, on an annualized basis for the Fund's then-current fiscal
year. Chase may voluntarily waive a portion of the fees payable to it with
respect to each Fund on a month-to-month basis.
43
<PAGE>
For the years ended August 31, 1995, August 31, 1996 and August 31, 1997
Chase was paid or accrued administration fees, and voluntarily waived the
amounts in parentheses for the following Funds:
<TABLE>
<CAPTION>
Fiscal Year- Fiscal Year- Fiscal Year-
Ended Ended Ended
8/31/95 8/31/96 8/31/97
------------------ ------------------ -------------
<S> <C> <C> <C>
Federal Money Market Fund
Paid or Accrued $194,538 $ 295,156
Waived ($ 61,243) none
Treasury Plus Money Market Fund
Paid or Accrued $ 11,331 $ 332,778
Waived ($ 11,331) ($ 49,071)
Prime Money Market Fund
Paid or Accrued $176,340 $ 550,477
Waived ($ 88,982) ($ 33,604)
California Intermediate
Tax Fee Income Fund
Paid or Accrued $ 34,001 $ 30,917
Waived ($ 34,001) ($ 30,917)
California Tax Free
Money Market Fund
Paid or Accrued $ 27,935 $ 24,272
Waived ($ 21,527) ($ 15,097)
U.S. Government
Money Market Fund
Paid or Accrued $720,093 $1,479,655
Waived none none
U.S. Treasury Securities
Money Market Fund
Paid or Accrued -- $ 741,264*
Waived -- none
Tax Free Money Market Fund
Paid or Accrued $220,141 $ 301,492
Waived none none
New York Tax Free Money
Market Fund
Paid or Accrued $190,823 $ 282,364
Waived none none
Tax Free Income Fund
Paid or Accrued $102,364 $ 95,431
Waived ($ 64,572) ($ 52,872)
New York Tax Free Income Fund
Paid or Accrued $111,164 $ 109,422
Waived ($ 81,265) ($ 17,600)
Cash Management Fund
Paid or Accrued -- $ 872,983*
Waived -- none
</TABLE>
- ----------
*Paid or accrued administrative fees for the period December 1, 1995 through
August 31, 1996.
44
<PAGE>
Distribution Plans
The Trust has adopted separate plans of distribution pursuant to Rule
12b-1 under the 1940 Act (a "Distribution Plan") including Distribution Plans
on behalf of the Class A and Class B shares of the Tax Free Income Fund and the
New York Tax Free Income Fund, the Class B and Class C shares of the Prime
Money Market Fund, the shares of the California Intermediate Tax Free Income
Fund, the Vista Shares of the Money Market Funds (except the Cash Management
Fund), and the Premier Shares of the U.S. Government Money Market Fund, which
provides that each of such classes of such Funds shall pay for distribution
services a distribution fee (the "Distribution Fee"), including payments to the
Distributor, at annual rates not to exceed the amounts set forth in their
respective Prospectuses. There is no distribution plan for the Cash Management
Fund. The Distributor may use all or any portion of such Distribution Fee to
pay for Fund expenses of printing prospectuses and reports used for sales
purposes, expenses of the preparation and printing of sales literature and
other such distribution-related expenses.
Class B and Class C shares pay a Distribution Fee of up to 0.75% of
average daily net assets. The Distributor currently expects to pay sales
commissions to a dealer at the time of sale of Class B shares of the Income
Funds of up to 4.00% of the purchase price of the shares sold by such dealer.
The Distributor will use its own funds (which may be borrowed or otherwise
financed) to pay such amounts. Because the Distributor will receive a maximum
Distribution Fee of 0.75% of average daily net assets with respect to Class B
and Class C shares, it will take the Distributor several years to recoup the
sales commissions paid to dealers and other sales expenses.
No class of shares of a Fund will make payments or be liable for any
distribution expenses incurred by other classes of shares of such Fund.
The Institutional Shares of the Money Market Funds have no distribution
plan. There is no distribution plan for Premier Shares for any Money Market
Fund other than the U.S. Government Money Market Fund.
Some payments under the Distribution Plans may be used to compensate
broker-dealers with trail or maintenance commissions in an amount not to exceed
0.25% annualized of the average net asset value of Class A shares, 0.25%
annualized of the average net asset value of the Class B shares, 0.75%
annualized of the average net asset value of Class C shares or 0.25% annualized
of the average daily net asset value of the shares of the California
Intermediate Tax Free Income Fund maintained in a Fund by such broker-dealers'
customers. Trail or maintenance commissions will be paid to broker-dealers
beginning the 13th month following the purchase of such shares. Since the
distribution fees are not directly tied to expenses, the amount of distribution
fees paid by a class of a Fund during any year may be more or less than actual
expenses incurred pursuant to the Distribution Plans. For this reason, this
type of distribution fee arrangement is characterized by the staff of the
Securities and Exchange Commission as being of the "compensation variety" (in
contrast to "reimbursement" arrangements by which a distributor's payments are
directly linked to its expenses). With respect to Class B shares of the Income
Funds, because of the 0.75% annual limitation on the compensation paid to the
Distributor during a fiscal year, compensation relating to a large portion of
the commissions attributable to sales of Class B shares in any one year will be
accrued and paid by a Fund to the Distributor in fiscal years subsequent
thereto. However, the Shares are not liable for any distribution expenses
incurred in excess of the Distribution Fee paid. In determining whether to
purchase Class B shares of the Income Funds, investors should consider that
compensation payments could continue until the Distributor has been fully
reimbursed for the commissions paid on sales of Class B shares.
Each class of shares is entitled to exclusive voting rights with respect
to matters concerning its Distribution Plan.
Each Distribution Plan provides that it will continue in effect
indefinitely if such continuance is specifically approved at least annually by
a vote of both a majority of the Trustees and a majority of the Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust and who
have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Trustees"). The continuance of each Distribution Plan was most recently
approved on October 13, 1995.
45
<PAGE>
Each Distribution Plan requires that the Trust shall provide to the Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended (and the purposes therefor) under the
Distribution Plan. Each Distribution Plan further provides that the selection
and nomination of Qualified Trustees shall be committed to the discretion of
the disinterested Trustees (as defined in the 1940 Act) then in office. Each
Distribution Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or, with respect to a particular Fund, by vote of a majority
of the outstanding voting Shares of the class of such Fund to which it applies
(as defined in the 1940 Act). Each Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without
a vote of the majority of both the Trustees and the Qualified Trustees. Each of
the Funds will preserve copies of any plan, agreement or report made pursuant
to a Distribution Plan for a period of not less than six years from the date of
the Distribution Plan, and for the first two years such copies will be
preserved in an easily accessible place.
For the fiscal year ended August 31, 1997, the Distributor was paid or
accrued the following Distribution Fees and voluntarily waived the amounts in
parenthesis following such fees with respect to the Shares of each Fund:
U.S. Government Money Market Fund
Vista Shares $
Premier Shares $
100% Treasury Securities Money Market Fund
Vista Shares $
Treasury Plus Money Market Fund
Vista Shares $
Prime Money Market Fund
B Shares $
Federal Money Market Fund
Vista Shares $
Tax Free Money Market Fund
Vista Shares $
Premier Shares $
New York Tax Free Money Market Fund
Vista Shares $
California Tax Free Money Market Fund $
Tax Free Income Fund
A Shares $
Tax Free Income Fund
B Shares $
New York Tax Free Income Fund
A Shares $
New York Tax Free Income Fund
B Shares $
California Intermediate Fund $
With respect to the shares of the following Funds, the Distribution Fees
were allocated as follows:
<TABLE>
<CAPTION>
Printing, Postage Sales Advertising &
Fund and Handling Compensation Administrative Filings
<S> <C> <C> <C>
New York Tax Free Money Market Fund
Vista Shares $ $ $
Tax Free Money Market Fund
Vista Shares $ $ $
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Printing, Postage Sales Advertising &
Fund and Handling Compensation Administrative Filings
<S> <C> <C> <C>
Premier Shares $ $ $
Federal Money Market Fund
Vista Shares $ $ $
California Tax Free Money Market Fund $ $ $
Tax Free Income Fund
A Shares $ $ $
B Shares $ $ $
New York Tax Free Income Fund
A Shares $ $ $
B Shares $ $ $
California Intermediate Tax Free Income Fund $ $ $
U.S. Government Money Market Fund
Vista Shares $ $ $
Premier Shares $ $ $
100% Treasury Securities Money Market Fund
Vista Shares $ $ $
Prime Money Market Fund
Class B Shares $ $ $
</TABLE>
Distribution and Sub-Administration Agreement
The Trust has entered into a Distribution and Sub-Administration Agreement
dated August 24, 1995 (prior to such date, the Distributor served the Trust
pursuant to a contract dated August 23, 1994 (April 15, 1994 with respect to
the Treasury Plus Money Market Fund and Federal Money Market Fund)) (the
"Distribution Agreement") with the Distributor, pursuant to which the
Distributor acts as the Funds' exclusive underwriter, provides certain
administration services and promotes and arranges for the sale of each class of
Shares. The Distributor is a wholly-owned subsidiary of BISYS Fund Services,
Inc. The Distribution Agreement provides that the Distributor will bear the
expenses of printing, distributing and filing prospectuses and statements of
additional information and reports used for sales purposes, and of preparing
and printing sales literature and advertisements not paid for by the
Distribution Plans. The Trust pays for all of the expenses for qualification of
the shares of each Fund for sale in connection with the public offering of such
shares, and all legal expenses in connection therewith. In addition, pursuant
to the Distribution Agreement, the Distributor provides certain
sub-administration services to the Trust, including providing officers,
clerical staff and office space.
The Distribution Agreement is currently in effect and will continue in
effect with respect to each Fund only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
such Fund's outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Distribution
Agreement is terminable without penalty by the Trust on behalf of each Fund on
60 days' written notice when authorized either by a majority vote of such
Fund's shareholders or by vote of a majority of the Board of Trustees of the
Trust, including a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust, or by the Distributor on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Distribution Agreement also
provides that neither the Distributor nor its personnel shall be liable for any
act or omission in the course of, or connected with, rendering services under
the Distribution Agreement, except for willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties.
In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary
47
<PAGE>
expenses such as litigation, for any fiscal year exceed the most restrictive
expense limitation applicable to that Fund imposed by the securities laws or
regulations thereunder of any state in which the shares of such Fund are
qualified for sale, as such limitations may be raised or lowered from time to
time, the Distributor shall reduce its sub-administration fee with respect to
such Fund (which fee is described below) to the extent of its share of such
excess expenses. The amount of any such reduction to be borne by the
Distributor shall be deducted from the monthly sub-administration fee otherwise
payable with respect to such Fund during such fiscal year; and if such amounts
should exceed the monthly fee, the Distributor shall pay to such Fund its share
of such excess expenses no later than the last day of the first month of the
next succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of 0.05% of the net assets of each Fund. The
Distributor may voluntarily agree to from time to time waive a portion of the
fees payable to it under the Distribution Agreement with respect to each Fund
on a month-to-month basis. For the fiscal years ended August 31, 1995, August
31, 1996 and August 31, 1997, the Distributor was paid or accrued the following
sub-administration fees under the Distribution Agreement, and voluntarily
waived the amounts in parentheses following such fees:
Fiscal Year- Fiscal Year- Fiscal Year-
-------------- -------------- ------------
Ended Ended Ended
8/31/95 8/31/96 8/31/97
-------------- -------------- ------------
Federal Money Market Fund
Paid or Accrued $194,538 $ 295,156 $
Waived 9,048 --
Treasury Plus Money Market Fund
Paid or Accrued 11,331 332,778
Waived 11,331 16,881
Prime Money Market Fund
Paid or Accrued 176,342 550,477
Waived -- --
California Intermediate
Tax Fee Income Fund
Paid or Accrued 17,001 15,438
Waived -- --
California Tax Free
Money Market Fund
Paid or Accrued 27,935 24,272 $
Waived -- --
U.S. Government
Money Market Fund
Paid or Accrued 720,093 1,479,655
Waived -- --
100% Treasury Securities
Money Market Fund
Paid or Accrued -- 265,361
Waived -- --
Cash Management Fund
Paid or Accrued -- 402,255
Waived -- --
Tax Free Money Market Fund
Paid or Accrued 220,141 301,492
48
<PAGE>
Fiscal Year- Fiscal Year- Fiscal Year-
-------------- -------------- -------------
Ended Ended Ended
8/31/95 8/31/96 8/31/97
-------------- -------------- -------------
Waived -- --
New York Tax Free Money
Market Fund
Paid or Accrued 190,823 282,364
Waived -- --
Tax Free Income Fund
Paid or Accrued 51,182 47,721
Waived -- --
New York Tax Free Income Fund
Paid or Accrued 55,725 54,712
Waived -- --
Shareholder Servicing Agents, Transfer Agent and Custodian
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent to provide certain services
including but not limited to the following: answer customer inquiries regarding
account status and history, the manner in which purchases and redemptions of
shares may be effected for the Fund as to which the Shareholder Servicing Agent
is so acting and certain other matters pertaining to the Fund; assist
shareholders in designating and changing dividend options, account designations
and addresses; provide necessary personnel and facilities to establish and
maintain shareholder accounts and records; assist in processing purchase and
redemption transactions; arrange for the wiring of funds; transmit and receive
funds in connection with customer orders to purchase or redeem shares; verify
and guarantee shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnish (either
separately or on an integrated basis with other reports sent to a shareholder
by a Shareholder Servicing Agent) quarterly and year-end statements and
confirmations of purchases and redemptions; transmit, on behalf of the Fund,
proxy statements, annual reports, updated prospectuses and other communications
to shareholders of the Fund; receive, tabulate and transmit to the Fund proxies
executed by shareholders with respect to meetings of shareholders of the Fund;
and provide such other related services as the Fund or a shareholder may
request. Shareholder servicing agents may be required to register pursuant to
state securities law.
Each Shareholder Servicing Agent may voluntarily agree from time to time
to waive a portion of the fees payable to it under its Servicing Agreement with
respect to each Fund on a month-to-month basis. Fees payable to the Shareholder
Servicing Agents (all of which currently are related parties) and the amounts
voluntarily waived for the following periods were as follows:
49
<PAGE>
<TABLE>
<CAPTION>
9/1/94 9/1/95 9/1/96
through through through
8/31/95 8/31/96 8/31/97
-------------------------- ------------------------ -------------------
Fund payable waived payable waived payable waived
- -------------------------- ------------ ----------- ------------ --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Money Market Fund
Vista Shares $816,674 -- $3,193,687 $791,007
Premier Shares 684,952 -- 2,336,485 194,645
100% Treasury
Securities Money
Market Fund
Vista Shares -- -- 4,161,761 803,962
Premier Shares -- -- 126 --
Cash Management
Fund
Vista Shares 348,526 106,710 4,086,512 143,866
Premier Shares 422,032 46 368,896 30,771
Treasury Plus
Money Market Fund
Vista Shares n/a n/a 1,747,171 711,428
Premier Shares 2,970 2,970 172,057 21,998
Federal Money Market Fund
Vista Shares 353,730 140,653 880,856 584,851
Premier Shares 109,180 15,790 455,489 41,636
Prime Money Market Fund
B Shares 10,080 5,488 25,702 25,702
Premier Shares 82,617 72,534 910,639 214,388
Tax Free Money
Market Fund
Vista Shares 367,259 -- 1,029,700 264,273
Premier Shares 344,945 131,039 465,133 139,053
N.Y. Tax Free
Money Market Fund 954,117 -- 1,976,547 415,903
California Tax Free
Money Market Fund 139,735 139735 169,905 152,096
Tax Free Income Fund
A Shares 223,990 179,192 201,911 173,806
B Shares 31,921 -- 37,015 --
N.Y. Tax Free Income Fund
A Shares 256,481 205,185 241,773 208,893
B Shares 21,430 -- 32,078 --
California Intermediate
Tax Free Fund 85,003 85,003 77,293 77,293
</TABLE>
There is no Shareholder Servicing Agent, and thus no shareholder servicing
fees, for the Institutional Shares of the Money Market Funds.
50
<PAGE>
The Trust has also entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Trust. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Chase acts as the custodian of the
assets of each Fund for which Chase receives such compensation as is from time
to time agreed upon by the Trust and Chase. As custodian, Chase provides
oversight and record keeping for the assets held in the portfolios of each
Fund. Chase also provides fund accounting services for the income, expenses and
shares outstanding for the Funds. Chase is located at 3 Metrotech Center,
Brooklyn, NY 11245. For additional information, see the Prospectuses.
INDEPENDENT ACCOUNTANTS
The financial statements incorporated herein by reference from the Trust's
Annual Reports to Shareholders for the fiscal year ended August 31, 1997, and
the related financial highlights which appear in the Prospectuses, have been
incorporated herein and included in the Prospectuses in reliance on the reports
of Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
independent accountants of the Funds, given on the authority of said firm as
experts in accounting and auditing. Price Waterhouse LLP provides the Funds
with audit services, tax return preparation and assistance and consultation
with respect to the preparation of filings with the Securities and Exchange
Commission.
CERTAIN REGULATORY MATTERS
Banking laws, including the Glass-Steagall Act as currently interpreted,
prohibit bank holding companies and their affiliates from sponsoring,
organizing, controlling, or distributing shares of, mutual funds, and generally
prohibit banks from issuing, underwriting, selling or distributing securities.
These laws do not prohibit banks or their affiliates from acting as investment
adviser, administrator or custodian to mutual funds or from purchasing mutual
fund shares as agent for a customer. Chase and the Trust believe that Chase
(including its affiliates) may perform the services to be performed by it as
described in the Prospectus and this Statement of Additional Information
without violating such laws. If future changes in these laws or interpretations
required Chase to alter or discontinue any of these services, it is expected
that the Board of Trustees would recommend alternative arrangements and that
investors would not suffer adverse financial consequences. State securities
laws may differ from the interpretations of banking law described above and
banks may be required to register as dealers pursuant to state law.
Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of any
of the Funds, including outstanding loans to such issuers which may be repaid
in whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in U.S. Government
obligations, municipal obligations and commercial paper and are among the
leading dealers of various types of U.S. Government obligations and municipal
obligations. Chase and its affiliates may sell U.S. Government obligations and
municipal obligations to, and purchase them from, other investment companies
sponsored by the Funds' distributor or affiliates of the distributor. Chase
will not invest any Fund assets in any U.S. Government obligations, municipal
obligations or commercial paper purchased from itself or any affiliate,
although under certain circumstances such securities may be purchased from
other members of an underwriting syndicate in which Chase or an affiliate is a
non-principal member. This restriction my limit the amount or type of U.S.
Government obligations, municipal obligations or commercial paper available to
be purchased by any Fund. Chase has informed the Funds that in making its
investment decision, it does not obtain or use material inside information in
the possession of any other division or department of Chase, including the
division that performs services for the Trust as custodian, or in the
possession of any affiliate of Chase. Shareholders of the Funds should be aware
that, subject to applicable legal or regulatory restrictions, Chase and its
affiliates may exchange among themselves certain information about the
shareholder and his account. Transactions with affiliated broker-dealers will
only be executed on an agency basis in accordance with applicable federal
regulations.
51
<PAGE>
GENERAL INFORMATION
Description of Shares, Voting Rights and Liabilities
Mutual Fund Trust is an open-end, management investment company organized
as Massachusetts business trust under the laws of the Commonwealth of
Massachusetts on February 4, 1994. Because certain of the Funds comprising the
Trust are "non-diversified", more than 5% of any of the assets of any such Fund
may be invested in the obligations of any single issuer, which may make the
value of the shares in such a Fund more susceptible to certain risks than
shares of a diversified mutual fund. The fiscal year-end of the Funds in the
Trust is August 31.
The Trust currently consists of 12 series of shares of beneficial
interest, par value $.001 per share. With respect to the Money Market Funds and
certain of the Income Funds, the Trust may offer more than one class of shares.
The Trust has reserved the right to create and issue additional series or
classes. Each share of a series or class represents an equal proportionate
interest in that series or class with each other share of that series or class.
The shares of each series or class participate equally in the earnings,
dividends and assets of the particular series or class. Expenses of the Trust
which are not attributable to a specific series or class are allocated amount
all the series in a manner believed by management of the Trust to be fair and
equitable. Shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held. Shares of each series or class
generally vote together, except when required under federal securities laws to
vote separately on matters that may affect a particular class, such as the
approval of distribution plans for a particular class. With respect to shares
purchased through a Shareholder Servicing Agent and, in the event written proxy
instructions are not received by a Fund or its designated agent prior to a
shareholder meeting at which a proxy is to be voted and the shareholder does
not attend the meeting in person, the Shareholder Servicing Agent for such
shareholder will be authorized pursuant to an applicable agreement with the
shareholder to vote the shareholder's outstanding shares in the same proportion
as the votes cast by other Fund shareholders represented at the meeting in
person or by proxy.
Shareholders of the Vista Shares, Premier Shares and Institutional Shares
of the Money Market Funds bear the fees and expenses described herein and in
the Prospectuses. The fees paid by the Vista Shares to the Distributor and
Shareholder Servicing Agent under the distribution plans and shareholder
servicing arrangements for distribution expenses and shareholder services
provided to investors by the Distributor and Shareholder Servicing Agents,
absent waivers, generally are more than the respective fees paid under
distribution plans and shareholder servicing arrangements adopted for the
Premier Shares. The Institutional Shares pay no distribution or Shareholder
Servicing fee. As a result, absent waivers, at any given time, the net yield on
the Vista Shares will be lower than the yield on the Premier Shares and the
yield on the Premier Shares will be lower than the yield on Institutional
Shares. Standardized yield quotations will be computed separately for each
class of shares of a Fund.
The Vista Tax Free Income Fund and Vista New York Tax Free Income Fund
offer both Class A and Class B shares. The classes of shares have several
different attributes relating to sales charges and expenses, as described
herein and in the Prospectuses. In addition to such differences, expenses borne
by each class of a Fund may differ slightly because of the allocation of other
class-specific expenses. For example, a higher transfer agency fee may be
imposed on Class B shares than on Class A shares. The relative impact of
initial sales charges, contingent deferred sales charges, and ongoing annual
expenses will depend on the length of time a share is held.
The Vista Prime Money Market Fund offers both Class B and Class C shares.
The classes of shares have different attributes relating to sales charges and
expenses as described in the Prospectus. The relative impact of contingent
deferred sales charges will depend upon the length of time a share is held.
Selected dealers and financial consultants may receive different levels of
compensation for selling one particular class of shares rather than another.
The Trust is not required to hold annual meetings of shareholders but will
hold special meetings of shareholders of a series or class when, in the
judgment of the Trustees, it is necessary or desirable to submit matters
52
<PAGE>
for a shareholder vote. Shareholders have, under certain circumstances, the
right to communicate with other shareholders in connection with requesting a
meeting of shareholders for the purpose of removing one or more Trustees.
Shareholders also have, in certain circumstances, the right to remove one or
more Trustees without a meeting. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each portfolio affected by the amendment.
The Trust's Declaration of Trust provides that, at any meeting of shareholders
of the Trust or of any series or class, a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are not represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by holders of all shares of
that portfolio otherwise represented at the meeting in person or by proxy as to
which such Shareholder Servicing Agent is the agent of record. Any shares so
voted by a Shareholder Servicing Agent will be deemed represented at the
meeting for purposes of quorum requirements. Shares have no preemptive or
conversion rights. Shares, when issued, are fully paid and non-assessable,
except as set forth below. Any series or class may be terminated (i) upon the
merger or consolidation with, or the sale or disposition of all or
substantially all of its assets to, another entity, if approved by the vote of
the holders of two-thirds of its outstanding shares, except that if the Board
of Trustees recommends such merger, consolidation or sale or disposition of
assets, the approval by vote of the holders of a majority of the series' or
class' outstanding shares will be sufficient, or (ii) by the vote of the
holders of a majority of its outstanding shares, or (iii) by the Board of
Trustees by written notice to the series' or class' shareholders. Unless each
series and class is so terminated, the Trust will continue indefinitely.
Certificates are issued only upon the written request of a shareholder,
subject to the policies of the investor's Shareholder Servicing Agent, but the
Trust will not issue a stock certificate with respect to shares that may be
redeemed through expedited or automated procedures established by a Shareholder
Servicing Agent. No certificates are issued for shares of the Money Market
Funds or Class B shares of the Income Funds.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts of
interest that can arise in connection with personal trading activities of such
persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions,
pre-clearance requirements and blackout periods.
53
<PAGE>
Principal Holders
As of November __, 1997, the following persons owned of record, directly
or indirectly, 5% or more of the outstanding shares of the following classes of
the following Funds:
Financial Statements
The 1997 Annual Report to Shareholders of each Fund including the reports
of independent accountants, financial highlights and financial statements for
the fiscal year ended August 31, 1997 contained therein, are incorporated
herein by reference.
Specimen Computations of Offering Prices Per Share
<TABLE>
<CAPTION>
<S> <C>
New York Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1997 $
Maximum Offering Price per Share ($ divided by .955) (reduced on purchases of
$100,000 or more) ..................................................................... $
New York Tax Free Income Fund B Shares (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1997 $
Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1997 $
Maximum Offering Price per Share ($ divided by .955) (reduced on purchases of
$100,000 or more)........................................................................ $
Tax Free Income Fund B Shares (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1997 $
California Intermediate Tax Free Income Fund (specimen computations)
Net Asset Value and Redemption Price per Share of Beneficial Interest at August 31, 1997 $
Maximum Offering Price per Share ($ divided by .955) (reduced on purchases of
$100,000 or more)........................................................................ $
The Shares of the Money Market Funds are offered for sale at Net Asset Value.
</TABLE>
54
<PAGE>
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
Maritime Administration Bonds--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA Bonds--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA Debentures--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S.
Government.
FHA Insured Notes--are bonds issued by the Farmers Home Administration of
the U.S. Government and are guaranteed by the U.S. Government.
GNMA Certificates--are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA
and the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates. The average life of a GNMA
Certificate is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures may result in the return of the greater
part of principal invested far in advance of the maturity of the mortgages in
the pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee. As the prepayment rate of individual mortgage pools will vary
widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates. The yield which will be earned on GNMA
Certificates may vary form their coupon rates for the following reasons: (i)
Certificates may be issued at a premium or discount, rather than at par; (ii)
Certificates may trade in the secondary market at a premium or discount after
issuance; (iii) interest is earned and compounded monthly which has the effect
of raising the effective yield earned on the Certificates; and (iv) the actual
yield of each Certificate is affected by the prepayment of mortgages included
in the mortgage pool underlying the Certificates. Principal which is so prepaid
will be reinvested, although possibly at a lower rate. In addition, prepayment
of mortgages included in the mortgage pool underlying a GNMA Certificate
purchased at a premium could result in a loss to a Fund. Due to the large
amount of GNMA Certificates outstanding and active participation in the
secondary market by securities dealers and investors, GNMA Certificates are
highly liquid instruments. Prices of GNMA Certificates are readily available
from securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the pool
of mortgages backing each Certificate. If agency securities are purchased at a
premium above principal, the premium is not guaranteed by the issuing agency
and a decline in the market value to par may result in a loss of the premium,
which may be particularly likely in the event of a prepayment. When and if
available, U.S. Government obligations may be purchased at a discount from face
value.
FHLMC Certificates and FNMA Certificates--are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.
GSA Participation Certificates--are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed
by the U.S. Government.
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New Communities Debentures--are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
Public Housing Bonds--are bonds issued by public housing and urban renewal
agencies in connection with programs administered by the Department of Housing
and Urban Development of the U.S. Government, the payment of which is secured
by the U.S. Government.
Penn Central Transportation Certificates--are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.
SBA Debentures--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
Washington Metropolitan Area Transit Authority Bonds--are bonds issued by
the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.
FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes and Bonds--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. Armory Board Bonds--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
Export-Import Bank Certificates--are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
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APPENDIX B
DESCRIPTION OF RATINGS*
The ratings of Moody's and Standard & Poor's represent their opinions as
to the quality of various Municipal Obligations. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields while Municipal Obligations of the same maturity and coupon
with different ratings may have the same yield.
Description of Moody's four highest municipal bond ratings
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Description of Moody's three highest ratings of state and municipal notes
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the
short run. A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation or commercial paper programs; such
ratings will be designated as "VMIG." Short-term ratings on issues with demand
features are differentiated by the use of the VMIG symbol to reflect such
characteristics as payment upon periodic demand rather than fixed maturity
dates and payment relying on external liquidity. Symbols used are as follows:
MIG-1/VMIG-1--Notes bearing this designation are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2/VMIG-2--Notes bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
- ----------
* As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time
to time revise such ratings, they undertake no obligation to do so.
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MIG-3/VMIG-3--Notes bearing this designation are of favorable quality, where
all security elements are accounted for but there is lacking the undeniable
strength of the preceding grade, liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
Description of Standard & Poor's four highest municipal bond ratings
AAA--Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Standard & Poor's ratings of municipal notes and tax-exempt
demand bonds
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
--Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/B-1+"). For the newer "demand notes," S&P's note
rating symbols, combined with the commercial paper symbols, are used (for
example, "SP-1+/A-1+").
Description of Standard & Poor's two highest commercial paper ratings
A--Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
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B-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Description of Moody's two highest commercial paper ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1, Prime-2 and Prime-3.
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Description of Fitch's ratings of municipal notes and tax-exempt demand bonds
Municipal Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issuer, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's financial strength and
credit quality.
AAA--Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1.
A--Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstance than bonds with higher ratings.
BBB--Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position
of credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.
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Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
F-3--Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
although near-term adverse changes could cause these securities to be rated
below investment grade.
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APPENDIX C
SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New York Municipal Bond Fund in New York municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New York municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.
New York State
New York State Financing Activities. There are a number of methods by
which New York State (the 'State') may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation borrowing (i.e., borrowing for more than
one year) unless the borrowing is authorized in a specific amount for a single
work or purpose by the New York State Legislature (the 'Legislature') and
approved by the voters. There is no limitation on the amount of long-term
general obligation debt that may be so authorized and subsequently incurred by
the State. With the exception of general obligation housing bonds (which must
be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes ("TRANs"), and (ii) in anticipation of the receipt
of proceeds from the sale of duly authorized but unissued bonds, by issuing
bond anticipation notes ("BANs"). TRANs must mature within one year from their
dates of issuance and may not be refunded or refinanced beyond such period.
BANS may only be issued for the purposes and within the amounts for which bonds
may be issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job
Development Authority and the Port Authority of New York and New Jersey. The
State has never been called upon to make any direct payments pursuant to such
guarantees. The constitutional provisions allowing a State-guarantee of certain
Port Authority of New York and New Jersey debt stipulates that no such
guaranteed debt may be outstanding after December 31, 1996. State-guaranteed
bonds issued by the Thruway Authority were fully retired on July 1, 1995.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financing, which involve obligations
of public authorities or municipalities that are State-supported but not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the
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Legislature and the actual availability of money to the State for making the
payments. The State has also entered into a contractual-obligation financing
arrangement with the New York Local Government Assistance Corporation ('LGAC')
to restructure the way the State makes certain local aid payments. The State
also participates in the issuance of certificates of participation ("COPs") in
a pool of leases entered into by the State's Office of General Services on
behalf of several State departments and agencies interested in acquiring
operational equipment, or in certain cases, real property. Legislation enacted
in 1986 established restrictions upon and centralized State control, through
the Comptroller and the Director of the Budget, over the issuance of COPs
representing the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to make installment
or lease-purchase payments for the State's acquisition of such equipment or
real property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees although there can be no assurance that
such a default or call will not occur in the future.
The State also employs moral obligation financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and statutory provisions require the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. There has never been a default on
any moral obligation debt of any public authority although there can be no
assurance that such a default will not occur in the future.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1996-97 fiscal
year. The State expects to issue $411 million in general obligation bonds
(including $153.6 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $101 million in COPs during the State's
1996-97 fiscal year for equipment purchases. The projection of the State
regarding its borrowings for the 1996-97 fiscal year may change if
circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.15 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for
1996-97 capital projects. Included therein are borrowings by (i) DASNY for
SUNY, The City University of New York ("CUNY"), health facilities, and mental
health facilities; (ii) Thruway Authority for the Dedicated Highway and Bridge
Trust Fund and Consolidated Highway Improvement Program; (iii) UDC (doing
business as the Empire State Development Corporation) for prison and youth
facilities; (iv) the Housing Finance Agency ("HFA") for housing programs; and
(v) borrowings by the Environmental Facilities Corporation ("EFC") or other
authorities. In addition, the Legislature has authorized DASNY to refinance a
$787 million pension obligation of the State.
In the 1996 legislative session, the Legislature approved the Governor's
proposal to present to the voters in November 1996 a $1.75 billion State
general obligation bond referendum to finance various environmental improvement
and remediation projects. If the Clean Water, Clean Air Bond Act is approved by
the voters, the amount of general obligation bonds issued during the 1996-97
fiscal year may increase above the $411 million currently included in the
1996-97 Borrowing Plan to finance a portion of this new program.
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation for
The City of New York ("MAC") was created to provide financing assistance to New
York City (the "City"). To enable MAC to pay debt service on its obligations,
MAC receives, subject to annual appropriation by the Legislature, receipts from
the 4% New York State Sales Tax for the Benefit of New York City, the
State-imposed Stock Transfer Tax and, subject to certain prior liens, certain
local assistance payments otherwise payable to the City. The legislation
creating MAC also includes a moral obligation provision. Under its enabling
legislation, MAC's authority to issue bonds and notes (other than refunding
bonds and notes) expired on December 31, 1984.
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State Financial Operations. The State has historically been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the nation as a whole, gradually eroding the
State's relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the suburbs and
an influx of generally less affluent residents. Regionally, the older Northeast
cities have suffered because of the relative success that the South and the
West have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although the State ranks 22nd in the nation for its State tax burden, the
State has the second highest combined state and local tax burden in the United
States. In 1991, total State and local taxes in New York were $3,349 per
capita, compared with $1,475 per capita in 1980. Between 1980 and 1991, State
and local taxes per capita increased at approximately the same rate in the
State as in the nation as a whole with per capita taxes in the State increasing
by 127% while such taxes increased 111% in the nation. The State Division of
the Budget ("DOB") believes, however, that it is more informative to describe
the state and local tax burden in terms of its relationship to personal income.
In 1992, total State and local taxes in New York were $154.70 per $1,000 of
personal income, compared with $152.70 in 1980. Between 1980 and 1992, State
and local taxes per $1,000 of personal income increased at a slower rate in the
State than in the nation as a whole with such taxes in the State increasing by
1.3 percent while such taxes increased 4 percent in the nation. The State and
its localities have used these taxes to develop and maintain their respective
transportation networks, public schools and colleges, public health systems,
other social services, and recreational facilities. Despite these benefits, the
burden of State and local taxation, in combination with the many other causes
of regional economic dislocation, may have contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the
State.
The national economy began expanding in 1991 and has added over 7 million
jobs since early 1992. However, the recession lasted longer in the State, and
the State's economic recovery has lagged behind the nation's. Although the
State has added approximately 185,000 jobs since November 1992, employment
growth in the State has been hindered during recent years by significant
cutbacks in the computer and instrument manufacturing, utility, defense, and
banking industries. DOB forecasted that national economic growth would weaken,
but not turn negative, during the course of 1995 before beginning to rebound.
This dynamic is often described as a 'soft landing.'
The national economy achieved the desired 'soft landing' in 1995, as
growth slowed from 6.2 percent in 1994 to a rate sufficiently slow to inhibit
the buildup of inflationary pressures. This was achieved without any material
pause in the economic expansion, although recession worries flared in the late
spring and early summer. Growth in the national economy is expected to moderate
during 1996. Real GDP grew only 0.9 percent in the fourth quarter of 1995, and
there were declines in the leading economic indicators in four of the past five
months. It is anticipated that slow economic growth will continue through the
first half of 1996 and inflationary pressures will be modest in 1996. Economic
growth will gradually accelerate in the second half of 1996 as the lower level
of interest rates over the last year is expected to stimulate economic
activity. Economic growth, as measured by the nation's nominal GDP, is
projected to expand by 4.3 percent in 1996 versus 4.6 in 1995. In 1992 dollars,
real GDP is expected to grow 1.8 percent as compared with the 2.1 percent
growth in 1995. By either measure, economic growth is projected to be
noticeably slower for 1996 than 1995.
To stimulate economic growth, the State has developed programs, including
the provision of direct financial assistance, designed to assist businesses to
expand existing operations located within the State and to attract new
businesses to the State. In addition, the State has provided various tax
incentives to encourage business relocation and expansion. These programs
include direct tax abatements from local property taxes for new facilities
(subject to locality approval) and investment tax credits that are applied
against the State corporation franchise tax. Furthermore, the State has created
40 'economic development zones' in economically distressed regions of the
States. Businesses in these zones are provided a variety
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of tax and other incentives to create jobs and make investments in the zones.
There can be no assurance that these programs will be successful.
From 1994 to 1995 the annual growth rates of most economic indicators for
the State improved. The pace of private sector employment expansion and
personal income and wage growth all accelerated. Government employment fell as
workforce reductions were implemented at federal, State and local levels.
Similar to the nation, some moderation of growth is expected in the year ahead.
Private sector employment is expected to continue to rise, although somewhat
more slowly than in 1995, while public employment should continue to fall,
reflecting government budget cutbacks. Anticipated continued restraint in wage
settlements, a lower rate of employment growth and falling interest rates are
expected to slow personal income growth significantly.
The State's current fiscal year commenced on April 1, 1996, and ends on
March 31, 1997, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the State's 1996-97 fiscal year, commencing on
April 1, 1996, was enacted by the Legislature on July 13, 1996. The State
Financial Plan for the 1996-97 fiscal year was formulated on July 25, 1996 and
is based on the State's budget as enacted by the Legislature and signed into
law by the Governor, as well as actual results for the first quarter of the
current fiscal year. The 1996-97 State Financial Plan is updated in October and
January. The 1996-97 State Financial Plan is projected to be balanced on a cash
basis. Total General Fund receipts and transfers from other funds are projected
to be $33.17 billion, while total General Fund disbursements and transfers to
other funds are projected to be $33.12 billion. After adjustments for
comparability, the adopted 1996-97 budget projects a year-over-year increase in
General Fund disbursements of 0.2 percent. As compared to the Governor's
proposed budget as revised on March 20, 1996, the State's adopted budget for
1996-97 increases General Fund spending by $842 million, primarily from
increases for education, special education and higher education ($563 million).
Resources used to fund these additional expenditures include $540 million in
increased revenues projected for 1996-97 based on higher than projected tax
collections during the first half of calendar 1996, $110 million in projected
receipts from a new State tax amnesty program, and other resources including
certain non-recurring resources.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, 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. In addition, the State Financial Plan
is 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. Many uncertainties exist in
forecasts of both the national and State economies, including consumer
attitudes toward spending, the extent of corporate and governmental
restructuring, federal fiscal and monetary policies, the level of interest
rates, and the condition of the world economy, which could have an adverse
effect on the State. Actual results could differ materially and adversely from
projections and those projections may be changed materially and adversely from
time to time.
The 1996-97 State Financial Plan includes actions that will have an effect
on the budget outlook for State fiscal year 1996-97 and beyond. The State
Division of the Budget estimates that the 1996-97 State Financial Plan contains
actions that provide non-recurring resources or savings totaling approximately
$1.3 billion, or 3.9% of total General Fund receipts. These include the use of
$481 million in surplus funds available from the Medical Malpractice Insurance
Association, $134 million in savings from a refinancing of certain pension
obligations, $88 million in projected savings from bond refundings, and $36
million in surplus fund transfers. The balance is composed of $314 million in
resources carried forward from the State's 1995-96 fiscal year and various
other actions, including that portion of the proposed tax amnesty program that
is projected to be non-recurring.
The State closed projected budget gaps of $5.0 billion and $3.9 billion
for its 1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap was
projected at $1.44 billion, based on the Governor's proposed budget of December
1995. As a result of changes made in the enacted budget, that gap is now
expected to be larger.
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The out-year projection will be impacted by a variety of factors. Enacted
tax reductions, which reduced receipts in the 1996-97 State fiscal year by an
incremental $2.4 billion, are projected to reduce receipts in the 1997-98 State
fiscal year by an additional increment of $2.1 billion. The use of up to $1.3
billion of non-recurring resources in 1996-97, and the annualized costs of
certain program increases in the 1996-97 enacted budget, will both add
additional pressure in closing the 1997-98 gap. However, actions undertaken in
the State's 1996-97 fiscal year, such as workforce reductions, health care and
education reforms, and strict controls on State agency spending, are expected
to provide larger recurring savings in State fiscal year 1997-98. Sustained
growth in the State's economy and continued declines in welfare caseload and
Medicaid costs would produce additional savings in the 1997-98 Financial Plan.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the Federal government and other factors have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce disbursements as it enacts the budget for that year, and under
the State Constitution, the Governor is required to propose a balanced budget
each year. There can be no assurance, however, that the Legislature will enact
the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring
receipts and disbursements in future fiscal years.
On October 29, 1996, the State issued its second quarterly update to the
1996-97 State Financial Plan based on updated economic forecasts, actual
receipts and disbursements for the first six months of the fiscal year and an
assessment of changing program requirements. The update reflects a balanced
1996-97 State Financial Plan, with a reserve for contingencies in the General
Fund of $300 million, which will be utilized to help offset a variety of
potential risks and other unexpected contingencies that the State may face
during the balance of the 1996-97 fiscal year. Actual receipts through the
first two quarters of the 1996-97 State fiscal year reflect
stronger-than-expected growth in most taxes, with actual receipts exceeding
expectations by $276 million, and, based on the revised economic outlook and
actual receipts for the first six months of 1996-97, projected General Fund
receipts for the 1996-97 State fiscal year have been increased by $420 million.
Uncertainties with regard to the economy, as well as the outcome of
certain litigation now pending against the State, could produce adverse effects
on the State's projections of receipts and disbursements. For example, changes
to current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
1996-97 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
On August 13, 1996, the State Comptroller released a report in which he
identified several risks to the State Financial Plan and estimated that the
State faces a potential imbalance in receipts and disbursements of
approximately $3 billion for the State's 1997-98 fiscal year and approximately
$3.2 billion for the State's 1998-99 fiscal year. The 1997-98 fiscal year
estimate by the State Comptroller is within the range previously discussed by
the State Division of the Budget.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalance in the
1997-98 Financial Plan primarily through General Fund expenditure reductions
and without increases in taxes or deferrals of scheduled tax reductions. It is
expected by the State Division of the Budget that the State's 1997-98 Financial
Plan will reflect a continuing strategy of substantially reduced State
spending, including agency consolidations, reductions in the State workforce,
and efficiency and productivity initiatives. The division of the Budget intends
to update the State Financial Plan and provide an update to the Annual
Information Statement upon release of the 1997-98 Executive Budget.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. On October 16,
1996, the Governor submitted the State's TANF implementation
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plan to the federal government, as required under the new federal welfare law.
Legislation will be required to implement the State's TANF plan. The Governor
has indicated that he plans to introduce legislation necessary to conform with
federal law shortly, and that he may submit amendments to the State plan if
necessary. The Governor's proposals will be available for consideration by the
Legislature either before the end of calendar 1996 or in the 1997 legislative
session. It is expected by the State that funding levels provided under the
federal TANF block grant will be higher than currently anticipated in the
State's financial plan. However, the net fiscal impact of any changes to the
State's welfare programs that are necessary to conform with federal law will be
dependent upon such factors as the ability of the State to avoid any federal
fiscal penalties, the level of additional resources required to comply with any
new State and/or federal requirements, and the division of non-federal welfare
costs between the State and its localities. States are required to comply with
the new federal welfare reform law no later than July 1, 1997. Given the size
and scope of the changes required under federal law, it is likely that these
proposals will produce extensive public discussions. There can be no assurances
that the State Legislature will enact welfare reform proposals as submitted by
the Governor and as required under federal law.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A delay in the adoption of the State's budget
beyond the statutory April 1 deadline could delay the projected receipt by the
City of State aid, and there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year (the '1995-96 State Financial Plan')
was formulated on June 20, 1995 and is based on the State's budget as enacted
by the Legislature and signed into law by the Governor. The State Financial
Plan is updated quarterly pursuant to law in July, October and January.
The 1995-96 budget is the first to be enacted in the administration of
Governor George Pataki, who assumed office on January 1, 1995. It is the first
budget in over half a century which proposed and, as enacted, projects an
absolute year-over-year decline in General Fund disbursements. Spending for
State operations is projected to drop even more sharply, by 4.6 percent.
Nominal spending from all State funding sources (i.e., excluding Federal aid)
is proposed to increase by only 2.5 percent from the prior fiscal year, in
contrast to the prior decade when such spending growth averaged more than 6.0
percent annually.
In his Executive Budget, the Governor indicated that in the 1995-96 fiscal
year, the 1995-96 State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts to
spur economic growth and provide relief for low and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million
to the then projected imbalance or budget gap, bringing the total to
approximately $5 billion.
The 1995-96 State Financial Plan contemplates closing this gap based on
the enacted budget, through a series of actions, mainly spending reductions and
cost containment measures and certain reestimates that are expected to be
recurring, but also through the use of one-time solutions. The 1995-96 State
Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs,
capital projects, the prison system and fringe benefits; (iii) $300 million in
savings from local assistance reforms, including actions affecting school aid
and revenue sharing while proposing program legislation to provide relief from
certain mandates that increase
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local spending; (iv) over $400 million in revenue measures, primarily a new
Quick Draw Lottery game, changes to tax payment schedules, and the sale of
assets; and (v) $300 million from reestimates in receipts. There can be no
assurance that these gap-closing measures can be implemented as planned.
The following discussion summarizes updates to the 1995-96 State Financial
Plan and recent fiscal years with particular emphasis on the State's General
Fund. Pursuant to statute, the State updates the financial plan at least on a
quarterly basis. Due to changing economic conditions and information, public
statements or reports may be released by the Governor, members of the
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the State's
financial condition, including potential operating results for the current
fiscal year and projected baseline gaps for future fiscal years, that may vary
materially and adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1995-96 fiscal year, the General Fund is expected by
the State to account for approximately 49 percent of total governmental-fund
receipts and 71 percent of total governmental-fund disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the
1995-96 fiscal year. Total receipts are projected to be $33.110 billion, an
increase of $48 million over total receipts in the prior fiscal year. Total
General Fund disbursements are projected to be $33.055 billion, an increase of
$344 million over the total amount disbursed and transferred in the prior
fiscal year.
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise more than 40
percent of total government funds receipts and disbursements in the 1995-96
fiscal year, about three-quarters of that activity relates to Federally-funded
programs.
Projected receipts in this fund type total $25.547 billion, an increase of
$1.316 billion over the prior year. Projected disbursements in this fund type
total $26.002 billion, an increase of $1.641 billion over 1994-95 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.209 billion in the
1995-96 fiscal year. Remaining projected spending of $6.793 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority (the 'MTA') funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs which
deliver services financed by user fees.
Capital Projects Funds are used to account for the financial resources
used for the acquisition, construction, or rehabilitation of major State
capital facilities and for capital assistance grants to certain local
governments or public authorities. This fund type consists of the Capital
Projects Fund, which is supported by tax dollars transferred from the General
Fund, and 37 other capital funds established to distinguish specific capital
construction purposes supported by other revenues. In the 1996-97 fiscal year,
activity in these funds is expected to comprise 6 percent of total governmental
receipts and disbursements.
Total receipts in this fund type are projected at $3.58 billion.
Disbursements from this fund type are projected to be $3.85 billion, a decrease
of $120 million (3.1 percent) over prior-year levels, due in part to a
reclassification of economic development projects to the category of grants to
local governments in the General Fund. The Dedicated Highway and Bridge Trust
Fund is the single largest dedicated fund, comprising an estimated $920 million
(24 percent) of the activity in this fund type. Total spending for capital
projects
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will be financed through a combination of sources: federal grants (28 percent),
public authority bond proceeds (34 percent), general obligation bond proceeds
(12 percent), and pay-as-you-go revenues (26 percent).
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1996-97 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General Fund,
and other funds established to accumulate moneys for the payment of debt
service. In the 1996-97 fiscal year, total disbursements in this fund type are
projected at $2.58 billion, an increase of $164 million or 16.8 percent. The
projected transfer from the General Fund of $1.59 billion is expected to
finance 62 percent of these payments.
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. General Fund moneys are also transferred to other funds, primarily to
support certain capital projects and debt service payments in other fund types.
A narrative description of cash-basis results in the General Fund is presented
below, followed by a tabular presentation of the actual General Fund results
for the prior three fiscal years.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. A national recession, followed by the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in receipts and
three budget deficits during those years. During its last four fiscal years,
however, the State has recorded balanced budgets on a cash basis, with positive
fund balances as described below.
The State ended its 1995-96 fiscal year on March 31, 1996 with a General
Fund cash surplus. The DOB reported that revenues exceeded projections by $270
million, while spending for social service programs was lower than forecast by
$120 million and all other spending was lower by $55 million. From the
resulting benefit of $445 million, a $65 million voluntary deposit was made
into the TSRF, and $380 million was used to reduce 1996-97 Financial Plan
liabilities by accelerating 1996-97 payments, deferring 1995-96 revenues, and
making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9
million deposit to the Revenue Accumulation Fund. The closing fund balance
includes $237 million on deposit in the TSRF, to be used in the event of any
future General Fund deficit as provided under the State Constitution and State
Finance Law. In addition, $41 million is on deposit in the CRF. The CRF was
established in State fiscal year 1993-94 to assist the State in financing the
costs of extraordinary litigation. The remaining $9 million reflects amounts on
deposit in the Revenue Accumulation Fund. This fund was created to hold certain
tax receipts temporarily before their deposit to other accounts. In addition,
$678 million was on deposit in the tax refund reserve account, of which $521
million was necessary to complete the restructuring of the State's cash flow
under the LGAC program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions
enacted and effective in both 1994 and 1995. General Fund disbursements totaled
$32.68 billion for the 1995-96 fiscal year, a decrease of 2.2 percent from
1994-95 levels. Mid-year spending reductions, taken as part of a management
review undertaken in October at the direction of the Governor, yielded savings
from Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements
achieved by State agencies.
Together with decreased social services spending, this management review
accounts for the bulk of the decline in spending.
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The State ended its 1994-95 fiscal year with the General Fund in balance.
The $241 million decline in the fund balance reflects the planned use of $264
million from the CRF, partially offset by the required deposit of $23 million
to the TSRF. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million
in the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9 percent
from 1993-94 levels. General Fund disbursements totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.
The increase in disbursements was primarily the result of one-time litigation
costs for the State, funded by the use of the CRF, offset by $188 million in
spending reductions initiated in January 1995 to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects.
The State ended its 1993-94 fiscal year with a General Fund cash surplus,
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. A deposit of $268 million was made to the CRF, with a
withdrawal during the year of $3 million, and a deposit of $67 million was made
to the TSRF. These three transactions result in the change in fund balance of
$332 million. In addition, a deposit of $1.14 billion was made to the tax
refund reserve account, of which $1.03 billion was available for budgetary
purposes in the 1994-95 fiscal year. (For more information on the personal
income tax refund reserve account, see Table 5.) The remaining $114 million was
redeposited in the tax refund reserve account at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the LGAC program. The General Fund closing balance was $399 million, of
which $265 million was on deposit in the CRF and $134 million in the TSRF. The
CRF was initially funded with a transfer of $100 million attributable to a
positive margin recorded in the 1992-93 fiscal year.
General Fund receipts totaled $32.23 billion, an increase of 2.6 percent
from 1992-93 levels. General Fund disbursements totaled $31.90 billion for the
1993-94 fiscal year, 3.5 percent higher than the previous fiscal year. Receipts
were higher in part due to improved tax collections from renewed State economic
growth although the State continued to lag behind the national economic
recovery. Disbursements were higher due in part to increased local assistance
costs for school aid and social services, accelerated payment of certain
Medicaid expenses, and the cost of an additional payroll for State employees.
Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most significant change
in the structure of these funds has been the redirection, beginning in the
1993-94 fiscal year, of a portion of transportation-related revenues from the
General Fund to two new dedicated funds in the Special Revenue and Capital
Projects Fund types. These revenues are used to support the capital programs of
the Department of Transportation and the MTA.
In the Special Revenue Funds, disbursements increased from $22.72 billion
to $26.26 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees
for criminal justice programs.
Disbursements in the Capital Projects Funds grew from $3.10 billion to
$3.97 billion over the last three years, as spending for transportation and
mental hygiene programs increased, partially offset by declines for corrections
and environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained
stable, and reimbursements from public authority bonds (primarily
transportation related) increased. The increase in the negative fund balance in
1994-95 resulted from delays in reimbursements caused by delays in the timing
of public authority bond sales.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and
the continued implementation of the LGAC fiscal reform
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program. The increases were moderated by the refunding savings achieved by the
State over the last several years using strict present value savings criteria.
The growth in LGAC debt service was offset by reduced short-term borrowing
costs reflected in the General Fund.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. For example, various proposals relating
to federal tax and spending policies that are currently being publicly
discussed and debated could, if enacted, have a significant impact on the
State's financial condition in the current and future fiscal years. Because of
the uncertainty and unpredictability of the changes, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent
of corporate and governmental restructuring, federal fiscal and monetary
policies, the level of interest rates, and the condition of the world economy,
which could have an adverse effect on the State. There can be no assurance that
the State economy will not experience results in the current fiscal year that
are worse than predicted, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or
revenue sources is generally made by estimating the change in yield of such tax
or revenue source caused by economic and other factors, rather than by
estimating the total yield of such tax or revenue source from its estimated tax
base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such
as the business and personal income taxes, are consistent with estimates of
total liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the
federal government, and changes in the demand for and use of State services.
The 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 in this Annual
Information Statement. In the past, the State has taken management actions and
made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget
gaps for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce disbursements as it enacts the budget for that year, and under
the State Constitution, the Governor is required to propose a balanced budget
each year. There can be no assurance, however, that the Leg-
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islature 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.
On January 13, 1992, Standard & Poor's ("S&P") lowered its rating on the
State's general obligation bonds from A to A--and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993 S&P revised the
rating outlook assessment to stable. On February 14, 1994, S&P revised its
outlook to positive and, on August 5, 1996, confirmed its A- rating. On January
6, 1992, Moody's reduced its ratings on outstanding limited-liability State
lease purchase and contractual obligations from A to Baa1. On July 26, 1996,
Moody's reconfirmed its A rating on the State's general obligation long-term
indebtedness.
On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A, the rating having been A1
since May 27, 1986. On November 12, 1990, Moody's confirmed the A rating. In
1992, S&P lowered the State's general obligation bond rating to A-, where it
currently remains and was affirmed on July 13, 1995. Prior to this, on March
26, 1990, S&P lowered its rating of all of the State's outstanding general
obligation bonds from AA- to A. Previous S&P ratings were AA-from August, 1987
to March, 1990 and A+ from November, 1982 to August, 1987.
Authorities. The fiscal stability of the State is related, in part, to the
fiscal stability of its public authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit
markets could be impaired, and the market price of its outstanding debt may be
materially adversely affected, if any of its public authorities were to default
on their respective obligations. As of September 30, 1995 there were 17
Authorities that had outstanding debt of $100 million or more each, and the
aggregate outstanding debt, including refunding bonds, of all state public
authorities was $73.45 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects financed or operated,
such as tolls charged for the use of highways, bridges or tunnels, rentals
charged for housing units, and charges for occupancy at medical care
facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State HFA, the New York State Urban Development Corporation and certain other
Authorities have in the past required and continue to require substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts, may be
required for these, or other, Authorities in the future. In addition, certain
other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid
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to Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
Metropolitan Transportation Authority. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line
on Staten Island. Through its affiliated agency, the Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance the mass
transit portion of these operations, the MTA has depended, and will continue to
depend for operating support upon a system of State, local government and TBTA
support, and, to the extent available, Federal operating assistance, including
loans, grants and operating subsidies. If current revenue projections are not
realized and/or operating expenses exceed current projections, the TA or
commuter railroads may be required to seek additional State assistance, raise
fares or take other actions.
Since 1980, the State has enacted several taxes--including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by
the MTA and a special one-quarter of 1 percent regional sales and use tax--that
provide revenues for mass transit purposes, including assistance to the MTA. In
addition, since 1987, State law has required that the proceeds of a one quarter
of 1% mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. Further, in 1993 the State dedicated a portion of the State
petroleum business tax to fund operating or capital assistance to the MTA. For
the 1996-97 fiscal year, total State assistance to the MTA is estimated by the
State to be approximately $1.09 billion.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance
a portion of a new $11.98 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"), and authorized the MTA to
submit the 1995-99 Capital Program to the Capital Program Review Board for
approval. This plan will supersede the overlapping portion of the MTA's 1992-96
Capital Program. This is the fourth capital plan since the Legislature
authorized procedures for the adoption, approval and amendment of MTA capital
programs and is designed to upgrade the performance of the MTA's transportation
systems by investing in new rolling stock, maintaining replacement schedules
for existing assets and bringing the MTA system into a state of good repair.
The 1995-99 Capital Program assumes the issuance of an estimated $5.1 billion
in bonds under this $6.5 billion aggregate bonding 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
the 1995-99 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1995-99
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional assistance.
Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1996-97
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
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Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
Municipal Indebtedness. Municipalities and school districts have engaged
in substantial short-term and long-term borrowings. In 1994, the total
indebtedness of all localities in the State other than the City was
approximately $17.7 billion. A small portion (approximately $82.9 million) of
that indebtedness represented borrowing to finance budgetary deficits and was
issued pursuant to State enabling legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than the City authorized by State law to issue
debt to finance deficits during the period that such deficit financing is
outstanding. Fifteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1994.
From time to time, proposed Federal expenditure reductions could reduce,
or in some cases eliminate, Federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements on
affected localities. If the State, the City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential
problems of declining urban population, increasing expenditures and other
economic trends could adversely affect certain localities and require
increasing State assistance in the future.
Litigation. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (i)
employee welfare benefit plans seeking a declaratory judgment nullifying on the
ground of federal preemption provisions of Section 2807-c of the Public Health
Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans; (ii) several challenges to provisions
of Chapter 81 of the Laws of 1995 which alter the nursing home Medicaid
reimbursement methodology; (iii) the validity of agreements and treaties by
which various Indian tribes transferred title to the State of certain land in
central and upstate New York; (iv) challenges to the practice of using
patients' Social Security benefits for the costs of care of patients of State
Office of Mental Health facilities; (v) an action against State and City
officials alleging that the present level of shelter allowance for public
assistance recipients is inadequate under statutory standards to maintain
proper housing; (vi) challenges to the practice of reimbursing certain Office
of Mental Health patient care expenses from the client's Social Security
benefits; (vii) alleged responsibility of State officials to assist in
remedying racial segregation in the City of Yonkers; (viii) alleged
responsibility of the State Department of Environmental Conservation for a
plaintiff's inability to complete construction of a cogeneration facility in a
timely fashion and the damages suffered thereby; (ix) challenges to the
promulgation of the State's proposed procedure to determine the eligibility for
and nature of home care services for Medicaid recipients; (x) a challenge to
State implementation of a program which reduces Medicaid benefits to certain
home-relief recipients; (xi) a challenge to the constitutionality of petroleum
business tax assessments authorized by Tax Law SS 301; and (xii) an action for
reimbursement from the State for certain costs arising out of the provision of
preschool services and programs for children with handicapping conditions,
pursuant to Sections 4410 (10) and (11) of the Education Law.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1996-97 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1996, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $474
million. There can be no assurance that an
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adverse decision in any of the above cited proceedings would not exceed the
amount of the 1996-97 State Financial Plan reserves for the payment of
judgments and, therefore, could affect the ability of the State to maintain a
balanced 1996-97 State Financial Plan.
New York City
The fiscal health of the State may also be impacted by the fiscal health
of its localities, particularly the City, which continues to require
significant financial assistance from the State. The City depends on State aid
both to enable the City to balance its budget and to meet its cash
requirements. The State could also be affected by the ability of the City to
market its securities successfully in the public credit markets. The City has
achieved balanced operating results for each of its fiscal years since 1981 as
reported in accordance with the then-applicable GAAP standards. The City's
financial plans are usually prepared quarterly, and the annual financial report
for its most recent completed fiscal year is prepared at the end of October of
each year.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities and a 'Control Period' from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to exercise various
fiscal-monitoring functions over the City, and upon the occurrence or
'substantial likelihood and imminence' of the occurrence of certain events,
including, but not limited to a City operating budget deficit of more than $100
million, the Control Board is required by law to reimpose a Control Period.
Currently, the City and its "Covered Organizations" (i.e., those which receive
or may receive money from the City directly, indirectly or contingently)
operate under a four-year financial plan, which the City prepares annually and
updates periodically and which includes the City's capital revenue and expense
projections and outlines proposed gap-closing programs for years with projected
budget gaps. The City's current four-year financial plan projects substantial
budget gaps for each of the 1997 through 1999 fiscal years, before
implementation of the proposed gap-closing program contained in the current
financial plan. The City is required to submit its financial plans to review
bodies, including the Control Board.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected federal or State
aid is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases
in taxes and reductions in essential City services. The City might also seek
additional assistance from the State. Unforseen 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.
Implementation of the Financial Plan is also dependent upon the ability of
the City and certain Covered Organizations to 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. The City currently projects that if no action is taken, it will exceed
its State Constitutional general debt limit beginning in City fiscal year 1998.
The current Financial Plan includes certain alternative methods of financing a
portion of the City's capital program which require State or other outside
approval. Future developments concerning
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the City or its Covered Organizations, 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 Covered Organizations and may also affect the market for their
outstanding securities.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements for, and Financial Plan compliance by, the City and its Covered
Organizations. According to recent staff reports, the City's economy has
experienced weak employment and moderate wage and income growth throughout the
mid-1990s. Although this trend is expected to continue for the rest of the
decade, there is the risk of a slowdown in the City's economy in the next few
years, which would depress revenue growth and put further strains on the City's
budget. These reports have also indicated that recent City budgets have been
balanced in part through the use of non-recurring resources; that the City's
Financial Plan tends to rely on actions outside its direct control; that the
City has not yet brought its long-term expenditure growth in line with
recurring revenue growth; and that the City is therefore likely to continue to
face substantial future budget gaps that must be closed with reduced
expenditures and/or increased revenues.
The 1997-2000 Financial Plan projects revenues and expenditures for the
1997 fiscal year balanced in accordance with GAAP. The projections for the 1997
fiscal year reflect proposed actions to close a previously projected gap of
approximately $2.6 billion for the 1997 fiscal year. The proposed actions for
the 1997 fiscal year include (i) additional agency actions totaling $1.2
billion; (ii) a revised tax reduction program which would increase projected
tax revenues by $385 million due to the four year extension of the 12.5%
personal income tax surcharge and other actions; (iii) savings resulting from
cost containment in entitlement programs to reduce City expenditures and
additional proposed State aid of $75 million; (iv) the assumed receipt of
revenues relating to rent payments for the City's airports totaling $269
million, which are currently the subject of a dispute with the Port Authority;
(v) the sale of the City's television station for $207 million; and (vi)
pension cost savings totaling $134 million resulting from a proposed increase
in the earnings assumption for pension assets from 8.5% to 8.75%, $40 million
of which the City currently does not expect to be achieved. There can be no
assurance that these gap-closing measures can be implemented as planned.
The Financial Plan also sets forth projections for the 1998 through 2000
fiscal years and projects gaps of $1.7 billion, $2.7 billion and $3.4 billion
for the 1998, 1999 and 2000 fiscal years, respectively.
The projections for the 1997 through 2000 fiscal years assume (i) approval
by the Governor and the State Legislature of the extension of the 12.5%
personal income tax surcharge, which is projected to provide revenue of $171
million, $447 million, $478 million and $507 million in the 1997 through 2000
fiscal years, respectively, (ii) collection of the projected rent payments for
the City's airports, which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's rights
under the existing leases thereto through pending legal actions; (iii) the
ability of HHC and BOE to identify actions to offset substantial City and State
revenue reductions and the receipt by BOE of additional State aid; and (iv)
State approval of the cost containment initiatives and State aid proposed by
the City. The Financial Plan does not reflect any increased costs which the
City might incur as a result of welfare legislation recently enacted by
Congress.
The City's financial plans have been the subject of extensive public
comment and criticism. On July 16, 1996, the staff of the City Comptroller
issued a report on the Financial Plan. The report concluded that the City's
fiscal situation remains serious, and that the City faces budgetary risks of
approximately $787 million to $941 million for the 1997 fiscal year, which
increase to $4.16 billion to $4.31 billion for fiscal year 2000.
In connection with the Financial Plan, the City has outlined a gap-closing
program for the 1998 through 2000 fiscal years to substantially reduce the
remaining $1.7 billion, $2.7 billion and $3.4 billion projected budget gaps for
such fiscal years. This program, which is not specified in detail, assumes
additional agency programs to reduce expenditures or increase revenues by $674
million, $959 million and $1.1 billion in the 1998 through 2000 fiscal years,
respectively; additional reductions in entitlement cost of $400 million, $750
million and $1.0 billion in the 1998 through 2000 fiscal years, respectively;
additional savings of $250 million, $300 million and $500 million in the 1998
through 2000 fiscal years, respectively, resulting from restructuring City
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government by consolidating operations, privatization and mandate management
and other initiatives; additional proposed federal and State aid of $105
million, $200 million and $300 million in the 1998 through 2000 fiscal years,
respectively; additional revenue initiatives and asset sales of $155 million,
$350 million and $400 million in the 1998 through 2000 fiscal years,
respectively; and the availability in each of the 1998 through 2000 fiscal
years of $100 million of the General Reserve.
The City's projected budget gaps for the 1999 and 2000 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1998 budget are not taken into account in projecting the budget
gaps for the 1999 and 2000 fiscal years.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years, and is projected to achieve balanced operating results
for the 1997 fiscal year, there can be no assurance that the gap-closing
actions proposed in the Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax
increases and reductions in essential City services could adversely affect the
City's economic base.
Assumptions
The 1997-2000 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1997-2000 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent,
if any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1997 through 2000 fiscal years; continuation of projected
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State, in the context of
the State's current financial condition, to provide the aid contemplated by the
Financial Plan and to take various other actions to assist the City; the
ability of HHC, BOE and other such agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; adoption of the City's budgets by the City
Council in substantially the forms submitted by the Mayor; the ability of the
City to implement proposed reductions in City personnel and other cost
reduction initiatives, and the success with which the City controls
expenditures; the impact of conditions in the real estate market on real estate
tax revenues; the City's ability to market its securities successfully in the
public credit markets; and unanticipated expenditures that may be incurred as a
result of the need to maintain the City's infrastructure. Certain of these
assumptions have been questioned by the City Comptroller and other public
officials.
The projections and assumptions contained in the 1997-2000 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that these estimates and projections, which include actions which
the City expects will be taken but which are not within the City's control,
will be realized. The principal projections and assumptions described below are
based on information available in May 1996.
Substantially all of the City's full-time employees are members of labor
unions. The Financial Emergency Act requires that all collective bargaining
agreements entered into by the City and the Covered Organizations be consistent
with the City's current financial plan, except for certain awards arrived at
through impasse procedures. During a Control Period, and subject to the
foregoing exception, the Control Board would be required to disapprove
collective bargaining agreements that are inconsistent with the City's current
financial plan.
Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i)
during the period of negotiations between the City and a union representing
municipal employees concerning a collective bargaining agreement; (ii) if an
impasse panel is appointed, then during the period commencing on the date on
which such panel is appointed and ending
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sixty days thereafter or thirty days after it submits its report, whichever is
sooner, subject to extension under certain circumstances to permit completion
of panel proceedings; or (iii) during the pendency of an appeal to the Board of
Collective Bargaining. Although State law prohibits strikes by municipal
employees, strikes and work stoppages by employees of the City and the Covered
Organizations have occurred.
The 1997-2000 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to federal or State funds, will decrease from an estimated level of
206,716 on June 30, 1996 to an estimated level of 203,793 by June 30, 2000,
before implementation of the gap closing program outlined in the Financial
Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The City has reached settlements with unions representing
approximately two-thirds of the City's workforce. The Financial Plan reflects
the costs of the settlements and assumes similar increases for all other
City-funded employees.
The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement. Legislation passed in February 1996 will place collective
bargaining matters relating to police and firefighters, including impasse
proceedings, under the jurisdiction of the State Public Employment Relations
Board ("PERB"), instead of the New York City Office of Collective Bargaining
("OCB"). OCB considers wage levels of municipal employees in similar cities in
the United States in reaching its determinations, while PERB's determinations
take into account wage levels in both private and public employment in
comparable communities, particularly within the State. In addition, PERB can
approve only two-year contracts, unlike OCB which can approve longer contracts.
For these reasons, among others, PERB jurisdiction could result in labor
settlements which impose higher costs on the City than those reached under
existing procedures. On January 23, 1996, the City requested the Office of
Collective Bargaining to declare an impasse against the Patrolmen's Benevolent
Association ("PBA") and the Uniformed Firefighters Association ("UFA"). In
addition, on February 29, 1996, the City commenced an action in the State
Supreme Court seeking a declaratory judgment confirming that OCB, rather than
PERB, has jurisdiction over collective bargaining matters relating to police.
On April 10, 1996, the Court issued a decision which found the legislation in
violation of the home rule provisions of the State Constitution, and held that
OCB and not PERB had jurisdiction over collective bargaining matters relating
to police. On September 12, 1996, the Appellate Division, First Department
affirmed this decision. The PBA has appealed the Apellate Division decision.
The projections for the 1997 through 2000 fiscal years reflect the costs
of the settlements with the United Federation of Teachers ("UFT") and a
coalition of unions headed by District Council 37 of the American Federation of
State, County and Municipal Employees ("District Council 37"), which together
represent approximately two-thirds of the City's workforce, and assume that the
City will reach agreement with its remaining municipal unions under terms which
are generally consistent with such settlements. The settlement provides for a
wage freeze in the first two years, followed by a cumulative effective wage
increase of 11% by the end of the five year period covered by the proposed
agreements, ending in fiscal years 2000 and 2001. Additional benefit increases
would raise the total cumulative effective increase to 13% above present costs.
Costs associated with similar settlements for all City-funded employees would
total $49 million, $459 million and $1.2 billion in the 1997, 1998 and 1999
fiscal years, respectively, and exceed $2 billion in each fiscal year after the
1999 fiscal year. There can be no assurance that the City will reach an
agreement with the unions that have not yet reached a settlement with the City
on the terms contained in the Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which can
impose a binding settlement except in the case of collective bargaining with
the UFT, which may be subject to non-binding arbitration. On January 23, 1996,
the City requested the Office of Collective Bargaining to declare an impasse
against the PBA and the UFA.
From time to time, the Control Board staff, MAC, OSDC, the City
Comptroller and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters,
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the City's financial plans, projected revenues and expenditures and actions by
the City to eliminate projected operating deficits. Some of these reports and
statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the
City may not have adequately provided for future contingencies. Certain of
these reports have analyzed the City's future economic and social conditions
and have questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and to
provide necessary services. It is reasonable to expect that reports and
statements will continue to be issued and to engender public comment.
On July 16, 1996, the City Comptroller issued a report on the Financial
Plan, which concluded that the City's fiscal situation remains serious. With
respect to the 1997 fiscal year, the report identified between $787 million and
$941 million in potential risks, including (i) $319 million in airport related
payments from the Port Authority that are the subject of arbitration; (ii) $202
million to $266 million in risks related to BOE resulting primarily from
unidentified expenditure reductions and projected State aid which has not been
appropriated by the State Legislature; (iii) possible tax revenue shortfalls
totaling $69 million, reflecting the potential impact that rising interest
rates may have on the economy; and (iv) $144 million relating to projected
overtime savings. In addition, the report noted that HHC has not provided any
details with respect to assumed expenditure reductions and revenue enhancements
to close a projected deficit for the 1997 fiscal year, and that HHC faces
additional uncertainties, including the impact of reform of the State's health
care reimbursement methodology, lower Medicaid and Medicare revenues due to
proposed reductions by the Federal Government and the impact of proposals to
privatize certain hospital facilities. The report also noted that the City's
capital budget includes risks in the 1997 fiscal year of $777 million,
including $607 million in capital from the proposed sale of the City's water
and sewer system, which the City Comptroller has opposed and which was ruled
unconstitutional in a unanimous decision of the Appellate Division of the State
Supreme Court.
With respect to fiscal years 1998 through 2000, the report identified
total risks of between $2.47 billion and $2.58 billion for the 1998 fiscal
year, $3.38 billion and $3.53 billion for the 1999 fiscal year and $4.16
billion and $4.31 billion for fiscal year 2000, which include the gaps
identified in the Financial Plan and the same categories of risks for fiscal
years 1998 through 2000 that the report identified for the 1997 fiscal year.
With respect to the City's capital budget for the 1998 through 2000 fiscal
years, the report identified risks of $1.5 billion, $1.7 billion and $1.4
billion, respectively, including the risk that the proposed Infrastructure
Finance Agency may not be approved by the State Legislature. The report also
noted that the City's reliance on $1.5 billion of nonrecurring actions for the
1997 fiscal year to close current year budget gaps and, therefore, defer them
into future fiscal years, has resulted in a rapid increase in the size of
estimated budget gaps for the later years of the Financial Plan. The largest of
these recent budget actions include City labor contracts, which defer major
costs until the end of the contract period, bond refundings, and the sale of
Mitchell-Lama mortgages. In a subsequent report, the City Comptroller set forth
various proposals to relieve overcrowding in the public schools, including
year-round schooling, double shifts, busing to nearby schools with available
space, and federal funding for new school construction and renovation projects.
On July 18, 1996, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that, while the City will end the 1996 fiscal year
with a balanced budget, the City has made no progress towards structural budget
balance, despite its headcount and entitlement reduction programs and higher
revenue collections. The report noted that the City relied on $1.4 billion in
non-recurring resources to achieve budget balance in the 1996 fiscal year and,
as a result, future projected gaps have increased to the largest the City has
ever faced. The report projected budget gaps of $74 million, $1.8 billion, $2.7
billion and $3.5 billion, and identified additional risks of $774 million, $1.3
billion, $1.0 billion and $1.1 billion, for the 1997 through 2000 fiscal years,
respectively. The principal risks identified in the report relate to (i)
uncertain State education aid and mandate relief, and unspecified expenditure
reductions, relating to BOE, totaling $327 million in the 1997 fiscal year and
$402 million in each of the 1998, 1999 and 2000 fiscal years; (ii) the receipt
of Port Authority lease payments totaling $314 million and $226 million in the
1997 and 1998 fiscal years, respectively; (iii) State approval of a four-year
extension to the City's personal income tax surcharge which would generate
revenues of $171 million, $447 million, $478 million and $507 million in the
1997 through
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2000 fiscal years, respectively; and (iv) the receipt of $200 million in the
1998 fiscal year in connection with a proposed sale of the New York Coliseum.
The report noted that the large future budget gaps result primarily from tax
cuts and the cost of labor agreements, and that revenues are projected to
increase 1.2% per year during the period covered by the Financial Plan, while
expenditures are projected to increase 6% per year. The report further noted
that the City's economy is heavily dependent on profits in the securities
sector, which are volatile, and that there is a strong likelihood of a downturn
in the national and local economies during the period of the Financial Plan,
which creates a risk to City tax collections beyond those quantified in the
report. In addition, the report noted that HHC could face a budget gap of
approximately $370 million for the 1997 fiscal year, resulting from lower
hospital utilization and other factors, and, with respect to the capital plan,
the report noted that the City anticipates funding over the next four years of
approximately $5.7 billion which is uncertain, including financing from the
proposed sale of the water and sewer system, savings from amendments to the
Wicks Law and the proceeds from the sale of bonds issued by the proposed
Infrastructure Finance Authority.
On July 18, 1996, the staff of the Control Board issued a report on the
Financial Plan. The report identified risks totaling $594 million, $1.1
billion, $851 million and $813 million, for the 1997 fiscal year, the 1998
fiscal year, the 1999 fiscal year and fiscal year 2000, respectively. The
principal risks identified in the report included (i) revenues from the
proposed extension of the 12.5% personal income tax surcharge totaling $171
million, $394 million, $419 million and $445 million in the 1997 through 2000
fiscal years, respectively, which requires State legislation; (ii)
implementation by BOE of various actions, totaling $56 million in the 1997
fiscal year and $334 million in each of the 1998 through 2000 fiscal years,
which include unspecified reductions and uncertain State funding; (iii) the
receipt of $314 million and $226 million from the Port Authority in the 1997
and 1998 fiscal years, respectively, which is the subject of arbitration; and
(iv) the potential for greater than forecast overtime spending totaling between
$71 and $77 million in each of the 1997 through 2000 fiscal years. Taking into
account the risks identified in the report and the unprecedented gaps projected
in the Financial Plan, the Control Board identified projected gaps of $2.8
billion, $3.5 billion and $4.2 billion for the 1998 fiscal year, the 1999
fiscal year and fiscal year 2000, respectively. The report concluded that the
City has not addressed its underlying problems, which include inadequate and
unstable revenue growth, high debt service expenditures and increasing costs of
health care and employee fringe benefits. The report noted that by fiscal year
2000, City-funded revenues will have grown by only 6.1% since the 1996 fiscal
year, which is substantially below the expected rate of inflation, while
expenditures are expected to grow at about the expected rate of inflation. The
report noted that this problem is increased by the volatility and cyclicality
of the City's tax revenues, which do not grow uniformly from one year to the
next and which are sensitive to fluctuations of the securities industry. The
report further noted that the City is approaching the limit on outstanding
general obligation debt permitted under the State Constitution and, as a
result, has proposed the creation of the Infrastructure Finance Authority. In
addition, the report stated that the City's structural imbalance has led to
insufficient funding for maintaining the existing capital plant through the
expense budget, and questioned whether the current capital plan is affordable
over the long term.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a 'flat' tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state
and local income taxes, could have a severe impact on funding methods under
which municipalities operate. With respect to property taxes, the report noted
that the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest
deduction would result in a significant reduction in affordability and, thus,
in the demand for, and the valuation of, real estate. The report noted that
rapid losses in property valuations would be felt by many municipalities,
hurting their revenue raising abilities. In addition, the report noted that the
loss of the current deduction for real property and state and local income
taxes from Federal income tax liability would make rate increases more
difficult and increase pressures to lower existing rates, and that the cost of
borrowing for municipalities could increase if the tax-exempt status of
municipal bond interest is worth less to investors. Finally, the report noted
that tax anticipation notes issued in anticipation of property taxes could be
hurt by the imposition of a flat tax, if uncertainty is introduced with regard
to their repayment
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revenues, until property values fully reflect the loss of mortgage and property
tax deductions.
On December 17, 1996, the Control Board issued a report noting that the
City's general tax revenues are growing much more slowly than the City's
expenditures, which will make it increasingly difficult to balance the budget.
On the same day, the staff of the City Comptroller issued a report which tended
to support the Control Board report, finding that the rate of growth of
personal income in the City was much lower than the national rate.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations for fiscal year 1997 to finance the current estimate of its
seasonal cash flow needs for the 1997 fiscal year. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion and $2.25 billion in the 1993
and 1992 fiscal years, respectively. The delay in the adoption of the State's
budget in certain past fiscal years has required the City to issue short-term
notes exceeding those expected early in such fiscal years.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the 1997-2000 Financial Plan. The City is a party
to numerous lawsuits and is the subject of numerous claims and investigations.
The City has estimated that its potential future liability on account of
outstanding claims against it as of June 30, 1996 amounted to approximately
$2.8 billion. This estimate was made by categorizing the various claims and
applying a statistical model, based primarily on actual settlements by type of
claim during the preceding ten fiscal years, and by supplementing the estimated
liability with information supplied by the City's Corporation Counsel.
On July 10, 1995, S&P revised downward its rating on City general
obligation bonds from A-to BBB+ and removed City bonds from CreditWatch. S&P
stated that 'structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector.' Other
factors identified by S&P's in lowering its rating on City bonds included a
trend of using one-time measures, including debt refinancings, to close
projected budget gaps, dependence on unratified labor savings to help balance
the Financial Plan, optimistic projections of additional federal and State aid
or mandate relief, a history of cash flow difficulties caused by State budget
delays and continued high debt levels.
Fitch Investors Service, Inc. ('Fitch') rates City general obligation
bonds A-. Moody's rating for City general obligation bonds is Baa1. On March 1,
1996, Moody's stated that the rating for the City's Baa1 general obligation
bonds remains under review for a possible downgrade pending the outcome of the
adoption of the City's budget for the 1997 fiscal year and in light of the
status of the debate on public assistance and Medicaid reform; the enactment of
a State budget, upon which major assumptions regarding State aid are dependent,
which may be extensively delayed; and the seasoning of the City's economy with
regard to its strength and direction in the face of a potential national
economic slowdown. Since July 15, 1993, Fitch has rated City bonds A-. On
February 28, 1996, Fitch placed the City's general obligation bonds on
FitchAlert with negative implications. On November 5, 1996, Fitch removed the
City's general obligation bonds from FitchAlert although Fitch stated that the
outlook remains negative. There is no assurance that such ratings will continue
for any given period of time or that they will not be revised downward or
withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of the City's general obligation bonds.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July
10, 1995, S&P revised its rating of City bonds downward to BBB+, as discussed
above. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1,
in May 1988 to A and again in February 1991 to Baa1. Since July 15, 1993, Fitch
has rated City bonds A-.
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APPENDIX D
SPECIAL INVESTMENT CONSIDERATIONS
RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
Overview
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per share and the interest
income of, the Vista California Tax Free Money Market Fund or the Vista
California Intermediate Tax Free Income Fund, or result in the default of
existing obligations, including obligations which may be held by the Vista
California Tax Free Money Market Fund or the Vista California Intermediate Tax
Free Income Fund. The following section provides only a brief summary of the
complex factors affecting the financial condition of California, and is based
on information obtained from California, as publicly available prior to the
date of this Statement of Additional Information. The information contained in
such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local
issuers may be unrelated to the creditworthiness of California, and that there
is no obligation on the part of California to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by California.
During the early 1990's California experienced significant financial
difficulties, which have reduced its credit standing but the state's finances
have improved since 1995. The ratings of certain related debt of other issuers
for which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50 states
(accounting for almost 13% of the nation's output of goods and services) and
one of the largest in the world. California's population of more than 32
million represents over 12% of the total United States population and grew by
27% in the 1980s. While California's substantial population growth during the
1980's stimulated local economic growth and diversification and sustained a
real estate boom between 1984 and 1990, it has increased strains on
California's limited water resources and demands for government services and
may impede future economic growth. Population growth slowed since 1991 even
while substantial immigration has continued, due to a significant increase in
outmigration by California residents. Generally, the household incomes of new
residents have been substantially lower (and their education and welfare
utilization higher) than those of departing households, which may have a major
long-term socioeconomic and fiscal impact. However, with the California economy
improving, the recent net outmigration within the Continental U.S. is expected
to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs lost. The largest job losses
have been in Southern California, led by declines in the aerospace and
construction industries. Most of the losses were related to cuts in federal
defense spending.
Since the start of 1994, the California economy has been experiencing
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, electronics, exports, transportation, recreation and services. This
growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Pre-recession
job levels were reached in early 1996, and job growth is estimated to remain
strong for the next few years.
Constitutional and Statutory Limitations on Taxes,
Other Charges and Appropriations
Limitations on Property Taxes. Certain California Instruments may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing
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power of California local governments and districts is limited by Article XIIIA
of the California "Proposition 13." Briefly, Article XIIIA limits to 1% of full
cash value the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme
Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, the so-called "Right to Vote on
Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State
Constitution, which contain a number of provisions affecting the ability of
local agencies to levy and collect both existing and future taxes, assessments,
fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended
or increased without voter approval after December 31, 1994 must be approved by
a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment,
imposed by a local government upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which
generate revenues exceeding the funds required to provide the property related
service or are used for unrelated purposes. There are new notice, hearing and
protest procedures for levying or increasing property related fees and charges,
and, except for fees or charges for sewer, water and refuse collection services
(or fees for electrical and gas service, which are not treated as "property
related" for purposes of Article XIIID), no property related fee or charge may
be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments,
fees and charges. Consequently, local voters could, by future initiative,
repeal, reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriation Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly
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amended by Propositions 98 and 111 in 1988 and 1990, respectively. Article
XIIIB prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfer of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual adjustment
factors since 1988, and depressed revenues for several years after 1990 because
of the recession, few governments, including the State, are currently operating
near their spending limits, but this condition may change over time. The
State's 1996-97 Budget Act provides for State appropriations more than $7
billion under the Article XIIIB limit. Local governments may by voter approval
exceed their spending limits for up to four years.
A 1986 initiative statute, called "Proposition 62," imposed additional
limits on local governments, by requiring either majority or 2/3 voter approval
for any increases in "general taxes" or "special taxes," respectively (other
than property taxes, which are unchangeable). Court decisions had struck down
most of Proposition 62 and many local governments, especially cities, had
enacted or raised local "general taxes" without voter approval. In September,
1995, the California Supreme Court overruled the prior cases, and upheld the
constitutionality of Proposition 62. Many aspects of this decision remain
unclear (such as its impact on charter (home rule) cities, and whether it will
have retroactive effect), but its future effect will be to further limit the
fiscal flexibility of many local governments.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies of
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these articles on California Instruments. It is not presently possible to
predict the outcome of any pending litigation with respect to the ultimate
scope, impact or constitutionality of either these articles, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund after support
of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of California
increased from $9.4 billion at June 30, 1987 to $23.3 billion at October 1,
1996. The State also had outstanding at October 1, 1996 $272 million of general
obligation commercial paper notes which will be refunded into long-term bonds
at a later date. In FY1995-96, debt service on general obligation bonds and
lease purchase debt was approximately 5.2% of General Fund revenues. State
voters approved $5.0 billion of new bond authorizations on the March 26, 1996
ballot, and an additional $2.1 billion on the November 5, 1996 ballot.
Recent Financial Results. The principal sources of General Fund revenues in
1994-1995 were the California personal income tax (43% of total revenues), the
sales tax (34%), bank and corporation taxes
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(13%), and the gross premium tax on insurance (3%). California maintains a
Special Fund for Economic Uncertainties ("SFEU"), derived from General Fund
revenues, as a reserve to meet cash needs of the General Fund. Because of the
recession, the SFEU has not been funded for the past four years.
General. Throughout the 1980s, California state spending increased rapidly
as California's population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Since the start of 1990-91 Fiscal Year, California has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected California's tax revenues. It also caused increased expenditures for
health and welfare programs. California is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund
(education, health, welfare and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the Years 1991-92 to 1994-95, including: significant cuts in health and
welfare program expenditures;
transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on
local government;
transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
reduction in growth of support for higher education programs, coupled with
increases in student fees;
revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less
federal aid than the State Administration had requested); and
various one-time adjustment and accounting changes. Despite these budget
actions, the effects of the recession led to large unanticipated deficits
in the SFEU, as compared to projected positive balances. By the start of
the 1993-94 Fiscal Year, the accumulated deficit was so large (almost $2.8
billion) that it was impractical to budget to retire it in one year, so a
two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in
1993-94, a second two-year plan was implemented in 1994-95, to carry the
final retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results. While General Fund revenues and expenditures
were essentially equal in Fiscal Year 1992-93 (following two years of excess
expenditures over revenues), the General Fund had positive operating results in
Fiscal Years 1993-94 through 1995-96, which have reduced the accumulated budget
deficit to less than $100 million as of June 30, 1996.
The State Department of Finance estimated that the General Fund received
revenues of about $46.1 billion in FY 1995-96, about $2 billion higher than was
originally expected, as a result of the strengthening
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economy. Expenditures totaled about $45.4 billion, also about $2 billion higher
than budgeted, in part because of the constitutional requirement to disburse
revenues to local school districts, and in part because federal actions to
reduce welfare costs and to pay for costs of illegal immigrants were not
forthcoming.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders. Available funds were used to make
constitutionally-mandated payments, such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring 1992
until 1995, the State had to rely on issuance of short-term notes which matured
in a subsequent fiscal year to finance its ongoing deficit and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowing during a fiscal
year.
Current Budget. The 1996-97 Budget Act was signed by the Governor on July
15, 1996, along with various implementing bills. The Legislature rejected the
Governor's proposed 15% cut in personal income taxes (to be phased over three
years), but did approve a 5% cut in bank and corporation taxes, to be effective
for income years starting on January 1, 1997. As a result, revenues for the
Fiscal Year are estimated to total $47.643 billion, a 3.3 percent increase over
the final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by $1.65
billion total above revised 1995-96 levels. Almost half of this money was
budgeted to fund class- size reductions in kindergarten and grades 1-3. Also,
for the second year in a row, the full cost of living allowance (3.2 percent)
was funded. The funding increases have brought K-12 expenditures to almost
$4,800 per pupil, an almost 15% increase over the level prevailing during the
recession years.
2. Proposed cuts in health and welfare totaling $660 million. All of these
cuts require federal law changes (including welfare reform, which was enacted),
federal waivers, or federal budget appropriations in order to be achieved.
Ultimate federal actions after enactment of the Budget Act will allow the State
to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of California and
the California State University system, with no increases in student fees for
the second consecutive year.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs
of illegal immigrants. These funds reduce appropriations in these categories
that would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue
Anticipation Notes to mature on June 30, 1997. The Budget Act appropriated a
modest budget reserve in the SFEU of $305 million, as of June 30, 1997. The
General Fund fund balance, however, still reflects $1.6 billion of "loans"
which the General Fund made to local schools in the recession years,
representing cash outlays above the mandatory minimum funding level. Settlement
of litigation over these transactions in July 1996 calls for repayment of these
loans over the period ending in 2001-02, about equally split between outlays
from the General Fund and from schools' entitlements. The 1996-97 Budget Act
contained a $150 million appropriation from the General Fund toward this
settlement.
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The Department of Finance projected, when the Budget Act was passed, that,
on June 30, 1997, the State's available internal borrowable (cash) resources
will be $2.9 billion, after payment of all obligations due by that date, so
that no external cross-fiscal year borrowing will be needed. The State will
continue to rely on internal borrowing and intra-year external note borrowing
to meet its cash flow requirements.
The Department of Finance has reported that, through the first five months
of the 1996-97 fiscal year, General Fund revenues have been about $460 million
(2.7%) above projection, reflecting the continued strength of the State's
economic recovery. This is offset by required increased payments to schools,
and lower than expected savings resulting from federal welfare reform actions.
The State has not yet given any prediction of how the federal welfare reform
law will impact the State's finances, or those of its local agencies; this
State is in the midst of making many decisions concerning implementation of the
new welfare law. A complete update of the FY 1996-97 budget will be released by
the Governor in early January, 1997, along with his proposed budget for FY
1997-98.
Bond Ratings. The ratings on California's long-term general obligation
bonds were reduced in the early 1990's from "AAA" levels which had existed
prior to the recession. In 1996, Fitch and Standard & Poor's raised their
ratings of California's general obligation bonds, which are currently assigned
ratings of "A+" from Standard & Poor's, "Al" from Moody's and "A+" from Fitch.
There can be no assurance that such ratings will be maintained in the future.
It should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of California to make payment on such obligations in the event of default.
Legal Proceedings. Calfornia is involved in certain legal proceedings
(described in California's recent financial statements) that, if decided
against California, may require California to make significant future
expenditures or may substantially impair revenues. Trial courts have recently
entered tentative decisions or injunctions which would overturn several parts
of the state's recent budget compromises. The matters covered by these lawsuits
include a deferral of payments by California to the Public Employees Retirement
System and reductions in welfare payments. These cases are subject to further
proceedings and appeals, and if California eventually loses, the final remedies
may not have to be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Instruments. There are a number of state
agencies, instrumentalities and political subdivisions of the State of
California that issue municipal obligations, some of which may be conduit
revenue obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the State
of California.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of
certain state revenues to local agencies and the assumption of certain
governmental functions by the State of California to assist municipal issuers
to raise revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could
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compound the serious fiscal constraints already experienced by many local
governments, particularly counties. A number of counties, both rural and urban,
have also indicated that their budgetary condition is extremely serious. At the
start of the 1995-96 fiscal year, Los Angeles County, the largest in the State,
had to make significant cuts in services and personnel, particularly in the
health care system, in order to balance its budget. The County's debt was
downgraded by Moody's and S&P in the summer of 1995. Orange County, which
recently emerged from federal bankruptcy protection, has substantially reduced
services and personnel in order to live within much reduced means.
Assessment Bonds. California Instruments which are assessment bonds may be
adversely affected by a general decline in real estate values or a slowdown in
real estate sales activity. In many cases, such bonds are secured by land which
is undeveloped at the time of issuance but anticipated to be developed within a
few years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed,
the lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds
in the event of delinquency in the payment of assessments or taxes, except from
amounts, if any, in a reserve fund established for the bonds.
California Long-Term Lease Obligations. Certain California long-term lease
obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
in unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g. due to earthquake). In the event abatement occurs with respect
to a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a state receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State of California was a named defendant (on the grounds
that it controlled the District's finances). One of the defenses raised in
answer to this lawsuit was the invalidity of the District's lease. The trial
court upheld the validity of the lease, and the case was subsequently settled.
Any ultimate judgment in any future case against the position taken by the
Trustee may have adverse implications for lease transactions of a similar
nature by other California entities.
Other Considerations
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in state regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program), including
risks related to the policy of awarding exclusive contracts to certain
hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
D-7
<PAGE>
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which typically are the issuers of tax
allocation securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which any
such legislation will be enacted. Nor is it presently possible to determine the
impact of any such legislation on California Instruments in which the
California Portfolio may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the interest
on, or repay the principal of, such California Instruments.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the California Portfolio could be affected by
an interruption of revenues because of damaged facilities, or, consequently,
income tax deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be constrained by the
inability of (i) an issuer to have obtained earthquake insurance coverage at
reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the federal or state government to
appropriate sufficient funds within their respective budget limitations.
D-8
<PAGE>
MUTUAL FUND TRUST
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial statements:
In Part A: Financial Highlights
In Part B: Financial Statements and the Reports thereon for the
Funds filed herein for the fiscal year ended August 31,
1996 are incorporated by reference into Part B as part
of the 1996 Annual Reports to Shareholders for such
Funds as filed with the Securities and Exchange
Commission by the Registrant on Form N-30D on November
5, 1996, accession number 0000950123-96-006191
and on Form N-30D on November 5, 1996, accession number
0000950123-96-006192. Financial Statements and the
Reports thereon for The 100% U.S. Treasury Securities
Money Market Fund and The Cash Management Fund of The
Hanover Funds, Inc. for the fiscal year ended November
30, 1995 are incorporated by reference into Part B as
part of the 1995 Annual Reports to Shareholders for such
funds as filed with the Securities and Exchange
Commission by The Hanover Funds, Inc. on Form N-30D on
February 2, 1996, accession number 0000950123-96-000335.
In Part C: None.
(b) Exhibits:
Exhibit
Number
- -------
1 Declaration of Trust. (1)
2 By-laws. (1)
3 None.
4 Specimen share certificate. (4)
5(a) Form of Investment Advisory Agreement. (1) and (3)
5(b) Form of Interim Investment Advisory Agreement.(6)
5(c) Form of Proposed Investment Advisory Agreement.(6)
5(d) Form of Proposed Investment Subadvisory Agreement between The Chase
Manhattan Bank and Chase Asset Management, Inc.(6)
5(e) Form of Proposed Investment Sub-Advisory Agreement between The
Chase Manhattan Bank and Texas Commerce Bank, National
Association. (7)
6(a) Form of Distribution and Sub-Administration Agreement. (1)
6(b) Distribution and Sub-Administration Agreement dated August 21,
1995.(6)
7(a) Retirement Plan for Eligible Trustees.(6)
7(b) Deferred Compensation Plan for Eligible Trustees.(6)
8(a) Form of Custodian Agreement. (1)
8(b) None.
9(a) Form of Transfer Agency Agreement. (1)
9(b) Form of Shareholder Servicing Agreement. (1)
9(c) Form of Shareholder Servicing Agreement. (6)
9(d) Agreement and Plan of Reorganization and Liquidation.(6)
9(e) Form of Administration Agreement. (1) and (3)
9(f) Form of Administration Agreement.(6)
10(a) Opinion of Reid & Priest re: Legality of Securities being
Registered. (2)
11 Consent of Price Waterhouse LLP. (11)
12 None.
13 N/A.
14 None.
15(a) Forms of Rule 12b-1 Distribution Plans including Selected Dealer
Agreements and Shareholder Service Agreements. (1) and (3)
15(b) Form of Proposed Rule 12b-1 Distribution Plan (including forms of
Selected Dealer Agreement and Shareholder Servicing Agreement).(6)
15(c) Form of Rule 12b-1 Plan - Class C Shares (including forms of
Shareholder Servicing Agreements). (12)
16. Schedule for Computation of Each Performance Quotation.(6)
C-1
<PAGE>
17. Financial Data Schedule. (8)
18. Form of Rule 18f-3 Multi-Class Plan. (12)
99(a) Power of Attorney for: Fergus Reid, III, H. Richard Vartabedian,
William J. Armstrong, John R. H. Blum, Stuart W. Cragin, Jr.,
Joseph J. Harkins, Irving L. Thode, W. Perry Neff, Roland R. Eppley,
Jr., W. D. MacCallan. (9)
99(b) Powers of Attorney for: Sarah E. Jones and Leonard M. Spalding,
Jr. (12)
- -------------------
(1) Filed as an Exhibit to the Registration Statement on Form N-1A of the
Registrant (File No. 33-75250) as filed with the Securities and Exchange
Commission on February 14, 1994.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A of the Registrant (File No. 33-75250) as filed with
the Securities and Exchange Commission on April 18, 1994.
(3) Filed as an Exhibit to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A of the Registrant (File No. 33-75250) as filed with
the Securities and Exchange Commission on August 29, 1994.
(4) Filed as an Exhibit to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A of the Registrant (File No. 33-75250) as filed with
the Securities and Exchange Commission on October 28, 1994.
(5) Filed as an Exhibit to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A of the Registrant (File No. 33- 75250) as filed
with the Securities and Exchange Commission on October 31, 1995.
(6) Filed as an Exhibit to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A of the Registrant as filed with the Securities and
Exchange Commission on December 28, 1995.
(7) Filed as an Exhibit to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A of the Registrant as filed with the Securities and
Exchange Commission on March 7, 1996.
(8) Filed as an Exhibit to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A of the Registrant as filed with the Securities and
Exchange Commission on April 22, 1996.
(9) Filed as an exhibit to Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A of the Registrant as filed with the Securities and
Exchange Commission on September 6, 1996.
(10) Filed as an exhibit to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A of the Registrant as filed with the Securities and
Exchange Commission on December 27, 1996.
(11) To be filed by amendment.
(12) Filed herewith.
ITEM 25. Persons Controlled by or Under Common
Control with Registrant
Not applicable
ITEM 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record
Holders as of
Title of Series September 30, 1997
--------------- ------------------
None
Vista Premier Institutional Class A Class B
Shares Shares Shares Shares Shares
------ ------ ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Vista(SM) Treasury Plus
Money Market Fund N/A 46 30 N/A N/A
Vista(SM) Federal Money
Market Fund 8,958 245 30 N/A N/A
Vista(SM) U.S. Government
Money Market Fund 9,314 545 258 N/A N/A
Vista(SM) Cash Management
Fund 13,613 382 89 N/A N/A
Vista(SM) Prime Money
Market Fund N/A 206 174 N/A 530
Vista(SM) Tax Free Money
Market Fund 2,018 167 46 N/A N/A
Vista(SM) California Tax Free
Money Market Fund 337 N/A N/A N/A N/A
Vista(SM) New York Tax Free
Money Market Fund 6,041 N/A N/A N/A N/A
Vista(SM) 100% U.S. Treasury
Securities Money Market Fund 8,052 20 25 N/A N/A
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
Vista Premier Institution Class A Class B
Shares Shares Shares Shares Shares
------ ------ ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Vista(SM) Tax Free Income
Fund N/A N/A N/A 2,345 505
Vista(SM) New York Tax Free
Income Fund N/A N/A N/A 2,576 496
Vista(SM) California Intermediate
Tax Free Income Fund N/A N/A N/A 568 N/A
</TABLE>
ITEM 27. Indemnification
Reference is hereby made to Article V of the Registrant's Declaration
of Trust.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser, administrator and distributor are insured
under an errors and omissions liability insurance policy. The Registrant and
its officers are also insured under the fidelity bond required by Rule 17g-1
under the Investment Company Act of 1940.
Under the terms of the Registrant's Declaration of Trust, the
Registrant may indemnify any person who was or is a Trustee, officer or
employee of the Registrant to the maximum extent permitted by law; provided,
however, that any such indemnification (unless ordered by a court) shall be
made by the Registrant only as authorized in the specific case upon a
determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the Trustees, by a
majority vote of a quorum which consists of Trustees who are neither in Section
2(a)(19) of the Investment Company Act of 1940, nor parties to the proceeding,
or (ii) if the required quorum is not obtainable or, if a quorum of such
Trustees so directs, by independent legal counsel in a written opinion. No
indemnification will be provided by the Registrant to any Trustee or officer of
the Registrant for any liability to the Registrant or shareholders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
Insofar as the conditional advancing of indemnification monies for
actions based upon the Investment Company Act of 1940 may be concerned, such
payments will be made only on the following conditions: (i) the advances must
be limited to amounts used, or to be used, for the preparation or presentation
of a defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds that amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Trustees, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against
C-3
<PAGE>
such liabilities (other than the payment by the Registrant of expenses incurred
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 it counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28(a) Business and Other Connections of Investment Adviser
The Chase Manhattan Bank (the "Adviser") is a commercial bank
providing a wide range of banking and investment services.
To the knowledge of the Registrant, none of the Directors or
executive officers of the Adviser, except those described below, are or have
been, at any time during the past two years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
Directors and executive officers of the Adviser also hold or have held various
positions with bank and non-bank affiliates of the Adviser, including its
parent, The Chase Manhattan Corporation. Each Director listed below is also a
Director of The Chase Manhattan Corporation.
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name the Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
<S> <C> <C>
Thomas G. Labreque Chairman of the Board, Chairman, Chief Executive Officer
Chief Executive Officer and a Director of The Chase
and Director Manhattan Corporation and a
Director of AMAX, Inc.
Richard J. Boyle Vice Chairman of the Vice Chairman of the Board and a
Board and Director Director of The Chase Manhattan
Corporation and Trustee of
Prudential Realty Trust
Robert R. Douglass Vice Chairman of the Vice Chairman of the Board and a
Board and Director Director of The Chase Manhattan
Corporation and Trustee of HRE
Properties
Joan Ganz Cooney Director Chairman of the Executive
Committee of the Board of
Trustees, formerly Chief Executive
Officer of Children's Television
Workshop and a Director of each
of Johnson & Johnson,
Metropolitan Life Insurance
Company and Xerox Corporation
Edward S. Finkelstein Director Retired Chairman and Chief
Executive Officer and Director of
R.H. Macy & Co., Inc. and a
Director of Time Warner Inc.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name the Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
<S> <C> <C>
H. Laurance Fuller Director Chairman, President, Chief
Executive Officer and Director of
Amoco Corporation and Director of
Abbott Laboratories
Howard C. Kauffman Director Retired President of Exxon
Corporation and a Director of each
of Pfizer Inc. and Ryder System,
Inc.
Henry B. Schacht Director Chairman and Chief Executive
Officer of Cummins Engine
Company, Inc. and a Director of
each of American Telephone and
Telegraph Company and CBS Inc.
A. Alfred Taubman Director Chairman and Director, formerly
also Chief Executive Officer, of
The Taubman Company, Inc.,
majority shareholder and Chairman
of Sotheby's Holdings, Inc., owner
of Woodward & Lothrop, Inc. and
its subsidiary, John Wanamaker,
and Chairman of A&W
Restaurants, Inc. and a Director of
R.H. Macy & Co., Inc.
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name the Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
<S> <C> <C>
Kay R. Whitmore Director Chairman of the Board,
President and Chief Executive
Officer and Director of Eastman
Kodak Company
</TABLE>
Item 28(b)
Chase Asset Management ("CAM" is an Investment Advisor providing investment
services to institutional clients.
To the knowledge of the Registrant, none of the Directors or executive
officers of the CAM, except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain Directors and
executive officers of the CAM also held or have held various positions with bank
and non-bank affiliates of the Advisor, including its parent. The Chase
Manhattan Corporation.
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name the Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
<S> <C> <C>
James Zeigon Chairman and Director Director of Chase
Asset Management
(London) Limited
Steven Prostano Executive Vice President Chief Operating Officer
and Chief Operating Officer and Director of Chase
Asset Management
(London) Limited
Mark Richardson President and Chief Chief Investment Officer
Investment Officer and Director of Chase
Asset Management
(London) Limited
</TABLE>
Item 28(c)
Texas Commerce Bank National Association ("TCB") is an Investment Adviser and
its business has been that of a national bank.
To the knowledge of the Registrant, none of the Directors or executive
officers of TCB, except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain Directors or
executive officers of TCB also hold or have held various positions with bank and
non-bank affiliates of the Adviser, including its parent, The Chase Manhattan
Corporation.
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name Sub-Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
<S> <C> <C>
John L. Adams Director, Vice Chairman None
Elaine B. Agather Chairman and CEO, TCB- None
Fort Worth, Vice Chairman,
TCB-Metroplex
C-6
<PAGE>
Principal Occupation or Other
Position with Employment of a Substantial
Name Sub-Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
David W. Biegler Director Chairman, President and CEO,
ENSERCH Corporation, 300 South
St. Paul St., Dallas, TX 75201
Robert W. Bishop Executive Vice President None
Alan R. Buckwalter, III Director, Vice Chairman None
H. Worth Burke Executive Vice President None
Charles W. Duncan Director Investments, 600 Travis,
Houston, TX 77002-3007
Dan S. Hallmark Chairman and CEO None
TCB-Beaumont
Dennis R. Hendrix Director Chairman, PanEnergy Corp.,
P.O. Box 1642, Houston, TX
77251-1642
Harold S. Hook Director Chairman and CEO, American
General Corporation, P.O. Box
3247, Houston TX 77253
C-7
<PAGE>
Principal Occupation or Other
Position with Employment of a Substantial
Name Sub-Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
Robert C. Hunter Director, Vice Chairman None
Ed Jones President and CEO, TCB- None
Midland
R. Bruce LaBoon Director Managing Partner, Liddell, Sapp,
Zivley, Hill & LaBoon, L.L.P.,
3400 Texas Commerce Tower,
Houston, TX 77002-3004
Shelaghmichael Executive Vice President None
C. Lents
S. Todd Maclin President, TCB-Dallas, None
Executive Vice President
Beverly H. McCaskill Executive Vice President None
Joe C. McKinney Chairman and CEO TCB-San None
Antonio
C-8
<PAGE>
Principal Occupation or Other
Position with Employment of a Substantial
Name Sub-Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
Scott J. McLean Chairman and CEO TCB-El Paso None
Randal B. McLelland President and CEO, TCB- None
Rio Grande Valley
David L. Mendez Executive Vice President None
W. Merriman Morton Chairman and CEO TCB-Austin None
Paul Poullard Exective Vice President None
Jeffrey B. Reitman General Counsel None
Edward N. Robinson Executive Vice President None
Ann V. Rogers Executive Vice President None
C-9
<PAGE>
Principal Occupation or Other
Position with Employment of a Substantial
Name Sub-Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
Marc J. Shapiro Director, Chairman, None
President and CEO
Larry L. Shryock Executive Vice President None
Kenneth L. Tilton Executive Vice President None
and Controller
Harriet S. Wasserstrum Executive Vice President None
Gary K. Wright Executive Vice President None
</TABLE>
ITEM 29. Principal Underwriters
(a) Vista Fund Distributors, Inc., a wholly-owned subsidiary of
The BISYS Group, Inc. is the underwriter for the Registrant.
(b) The following are the Directors and officers of Vista Fund
Distributors, Inc. The principal business address of each of these persons,
with the exception of Mr. Spicer, is 101 Park Avenue, New York, New York 10178.
The principal business address of Mr. Spicer is One Bush Street, San Francisco,
California 94104.
<TABLE>
<CAPTION>
Position and Offices Position and Offices
Name with Distributor with the Registrant
- ---- -------------------- --------------------
<S> <C> <C>
William B. Blundin Director Chief Executive Officer None
Richard E. Stierwalt Director Chief Operating Officer None
Timothy M. Spicer Director Chairman of the Board None
Joseph Kissel President None
George Martinez Chief Compliance Officer Secretary and
and Secretary Assistant Treasurer
</TABLE>
(c) Not applicable
ITEM 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or
in part, at the office of the Registrant and the following locations:
C-10
<PAGE>
Name Address
---- -------
Vista Fund Distributors, Inc. 101 Park Avenue,
New York, NY 10022
DST Systems, Inc. 210 W. 10th Street,
Kansas City, MO 64105
The Chase Manhattan Bank 270 Park Avenue,
New York, NY 10017
The Chase Manhattan Bank One Chase Square,
Rochester, NY 14363
Chase Asset Management, Inc. 1211 Avenue of the
Americas,
New York, NY 10036
Texas Commerce Bank, National Association 600 Travis,
Houston, TX 77002
ITEM 31. Management Services
Not applicable
ITEM 32. Undertakings
(1) Registrant undertakes that its trustees shall promptly call a
meeting of shareholders of the Trust for the purpose of voting upon the
question of removal of any such trustee or trustees when requested in writing
so to do by the record holders of not less than 10 per centum of the
outstanding shares of the Trust. In addition, the Registrant shall, in certain
circumstances, give such shareholders assistance in communicating with other
shareholders of a fund as required by Section 16(c) of the Investment Company
Act of 1940.
(2) The Registrant, on behalf of the Funds, undertakes, provided the
information required by Item 5A is contained in the latest annual report to
shareholders, to furnish to each person to whom a prospectus has been
delivered, upon their request and without charge, a copy of the Registrant's
latest annual report to shareholders.
C-11
<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 to its Registration Statement on Form N-1A to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York and the
State of New York on the 24th day of October, 1997.
MUTUAL FUND TRUST
By /s/ H. Richard Vartabedian
--------------------------
H. Richard Vartabedian
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
* Chairman October 24, 1997
- ------------------------------- and Trustee
Fergus Reid, III
* Trustee October 24, 1997
- -------------------------------
William J. Armstrong
* Trustee October 24, 1997
- -------------------------------
John R.H. Blum
* Trustee October 24, 1997
- -------------------------------
Joseph J. Harkins
*
- ------------------------------- Trustee October 24, 1997
Richard E. Ten Haken
* Trustee October 24, 1997
- -------------------------------
Stuart W. Cragin, Jr.
* Trustee October 24, 1997
- -------------------------------
Irving L. Thode
/s/ H. Richard Vartabedian President October 24, 1997
- ------------------------------- and Trustee
H. Richard Vartabedian
* Trustee October 24, 1997
- -------------------------------
W. Perry Neff
* Trustee October 24, 1997
- -------------------------------
Roland R. Eppley, Jr.
* Trustee October 24, 1997
- -------------------------------
W.D. MacCallan
* Trustee October 24, 1997
- -------------------------------
Sarah E. Jones
/s/ Martin Dean Treasurer and October 24, 1997
- ------------------------------- Principal
Martin Dean Accounting
Officer
/s/ H. Richard Vartabedian Attorney in Fact October 24, 1997
- -------------------------------
H. Richard Vartabedian
CLASS "C" SHARE
DISTRIBUTION PLAN
OF
MUTUAL FUND TRUST
Distribution Plan, dated as of October ___, 1997, of Mutual Fund
Trust, a Massachusetts business trust (the "Trust"), with respect to Class C
shares to be issued by one or more series of the Trust.
Section 1. One or more series of the Trust as listed in Schedule A
(herein after each such series is referred to as a "Fund") may act as a
distributor of the shares of the Class C Shares (the "Shares") of which the Fund
is the issuer, pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "1940 Act") according to the terms of this Distribution Plan (the "Plan").
Section 2. Each Fund may incur as a distributor of the Shares,
expenses at the annual rate of 0.75% of the average daily net assets of each
class of Shares, subject to any applicable limitations imposed from time to time
by applicable rules of the National Association of Securities Dealers, Inc.
Section 3. Amounts set forth in Section 2 may be used to finance any
activity which is primarily intended to result in the sale of the Shares,
including, but not limited to, (i) the development, formulation and
implementation of marketing and promotional activities, including direct mail
promotions and television, radio, magazine, newspaper, electronic and media
advertising; (ii) the preparation, printing and distribution of prospectuses and
statements of additional information (and supplements thereto) and reports
(other than prospectuses and statements of additional information (and
supplements thereto) or reports used for regulatory purposes or for distribution
to existing shareholders); (iii) the preparation, printing and distribution of
sales literature; (iv) expenditures for sales or distribution support services
such as for telephone facilities and in-house telemarketing; (v) preparation of
information, analyses and opinions with respect to marketing and promotional
activities; (vi) commissions, incentive compensation, finders fees or other
compensation to, and expenses of employees of Vista Fund Distributors, Inc.
("Distributors"), brokers, dealers and other financial institutions attributable
to distribution or sales support activities, as applicable, including interest
expenses and other costs associated with financing of such commissions,
compensation and expenses; (vii) travel, equipment, printing, delivery and
mailing costs, overhead and other office expenses of Distributors attributable
to distribution or sales support activities, as applicable; (viii) the costs of
administering this Plan; (ix) expenses of organizing and conducting sales
seminars; and (x) any other costs and expenses relating to distribution or sales
support activities. To the extent that amounts paid hereunder are not used
specifically to reimburse Distributors for any such expense, such amounts may be
treated as compensation for Distributors' distribution-related services. All
amounts expended pursuant to the Plan shall be paid to Distributors and are the
legal obligation of the Fund and not of Distributors. That portion of the
amounts paid under the Plan that is not paid or advanced by Distributors to
dealers or other institutions that provide personal continuing shareholder
service as a service fee pursuant to Section 4 shall be deemed as asset-based
sales charge.
<PAGE>
Section 4.
(a) Amounts expended by the Fund under the Plan may be used in
part for the implementation by Distributors of shareholder service
arrangements with respect to the Shares. The maximum service fee paid to
any service provider for acting as liaison to shareholders and providing
personal services to shareholders shall be twenty-five one-hundredths of
one percent (0.25%) per annum of the average daily net assets of the
Shares attributable to the customers of such service provider. For the
avoidance of doubt, it is understood that amounts that may be expended
under this Section 4 are in addition to the maximum amounts that may be
expended under Section 2.
(b) Pursuant to this program Distributors may enter into
agreements substantially in the form attached hereto as Exhibit A
("Service Agreements") with such broker-dealers ("Dealers") as may be
selected from time to time by Distributors for the provision of
distribution-related personal shareholder services in connection with the
sale of Shares to the Dealers' clients and customers ("Customers") who may
from time to time directly or beneficially own Shares. The
distribution-related personal continuing shareholder services to be
rendered by Dealers under the Service Agreements may include, but shall
not be limited to, the following: distributing sales literature; answering
routine Customer inquiries concerning the Fund and the Shares; assisting
Customers in changing dividend options, account designations and
addresses, and in enrolling in any of several retirement plans offered in
connection with the purchase of Shares; assisting in the establishment and
maintenance of customer accounts and records and in the processing of
purchase and redemption transactions; investing dividends and capital
gains distributions automatically in shares and providing such other
information and services as the Fund or the Customer may reasonably
request.
(c) Distributors may also enter into Bank Shareholder Service
Agreements substantially in the form attached hereto as Exhibit B ("Bank
Agreements") with selected banks acting in an agency capacity for their
customers ("Banks"). Banks acting in such capacity will provide
shareholder services to their customers as set forth in the Bank
Agreements from time to time.
Section 5. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of the majority of both
(a) the Board of Trustees of the Fund and (b) those trustees of the Fund who are
not "interested persons" of the Fund (as defined in the 1940 Act) and have no
direct or indirect financial interest in the operation of this Plan or any
agreements related to it (the "Non-interested Trustees"), cast in person at a
meeting called for the purpose of voting on this Plan or such agreements.
Section 6. Unless sooner terminated pursuant to Section 8, this Plan
shall continue in effect for a period of one year from the date it takes effect
and thereafter shall continue in effect so long as such continuance is
specifically approved at least annually in the manner provided in Section 5.
<PAGE>
Section 7. Distributors shall provide to the Board of Trustees and
the Board of Trustees shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were made.
Section 8. This Plan may be terminated at any time by vote of a
majority of the Non-interested Trustees, or by vote of a majority of the
outstanding voting securities of the Shares.
Section 9. Any agreement related to this Plan shall be made in
writing, and shall provide:
(a) that such agreement may be terminated at any time, without
payment of any penalty, by vote of a majority of the Non-interested
Trustees or by a vote of the outstanding voting securities of the Fund
attributable to the Shares, on not more than sixty (60) days' written
notice to any other party to the agreement; and
(b) that such agreement shall terminate automatically in the
event of the assignment.
Section 10. This Plan may not be amended to increase materially the
amount of distribution expenses provided for in Section 2 hereof unless such
amendment is approved by a vote of at least a "majority of the outstanding
securities" (as defined in the 1940 Act) of the Shares, and no material
amendment to the Plan shall be made unless approved in the manner provided for
in Section 5 hereof.
<PAGE>
Schedule A
Funds in Program
Vista Prime Money Market Fund
<PAGE>
EXHIBIT A
CLASS C SHARE
BANK SHAREHOLDER
SERVICE AGREEMENT
The undersigned _________________ ("Bank") desires to enter into an
Agreement with Vista Fund Distributors, Inc. ("Distributors"). acting as agent
for Mutual Fund Trust (the "Trust"), for servicing of Bank's agency clients who
hold Class C shares series of the Trust of, and the administration of such
shareholder accounts in the Class C shares of the series of Trust (hereinafter
referred to as the "Shares"). Subject to Distributors' acceptance of this
Agreement, the terms and conditions of this Agreement shall be as follows:
1. Bank shall provide continuing personal shareholder and
administration services for holders of the Shares who are also Bank's
clients. Such services to Bank's clients may include, without limitations,
some or all of the following: answering shareholder inquiries regarding
the Shares and the Trust; performing subaccounting; establishing and
maintaining shareholder accounts and records; processing and bunching
customer purchase and redemption transactions; providing periodic
statements showing a shareholder's account balance and the integration of
such statements with those of other transactions and balances in the
shareholder's account, and the integration of such statements with those
of other transactions and balances in the shareholder's other accounts
serviced by Bank, forwarding prospectuses, proxy statements, reports and
notices to clients who are holders of Shares; and such other
administrative services as Distributors reasonably may request, to the
extent Bank is permitted by applicable statute, rule or regulations to
provide such services. Bank represents that it shall accept fees hereunder
only so long as it continues to provide personal shareholder services to
shareholders of the Trust.
2. The client will be the beneficial owner of the Shares
purchased and held by Bank in accordance with the client's instructions
and the client may exercise all applicable rights of a holder of such
Shares. Bank will transmit to the Trust's transfer agent, in a timely
manner, all purchase orders and redemption requests of Bank's clients and
forward to each client any proxy statements, periodic shareholder reports
and other communications received from Distributors by Bank on behalf of
clients. Distributors agrees to pay all out-of-pocket expenses actually
incurred by Distributors in connection with the transfer by Bank of such
proxy statements and reports to Bank's clients as required by applicable
law or regulation. Bank agrees to transfer record ownership of client's
Shares to the client promptly upon the request of a client. In addition
record ownership will be promptly transferred to the client in the event
that the person or entity ceases to be Bank's client.
3. Within five (5) business days of placing a purchase order
Bank agrees to send (i) a cashier's check to Distributors, or (ii) a wire
transfer to the Trust's
<PAGE>
transfer agent, in an amount equal to the amount of all purchase orders
placed by Bank on behalf of its clients and accepted by Distributors.
4. Bank agrees to make available to Distributors such
information related to clients who are beneficial owners of Shares and
their transactions in such Shares as may be required by applicable laws
and regulations or as may be reasonably requested by Distributors. The
names of Bank's customers shall remain Bank's sole property and shall not
be used by Distributors for any other purpose except as needed in the
normal course of business to holders of the Shares.
5. Except as may be provided in a separate written agreement
between Distributors and Bank, neither Bank nor any of its employees or
agents are authorized to assist in distribution of any of the Trust's
shares except those contained in the then current Prospectus applicable to
the Shares; and Bank shall have no authority to act as agent for
Distributors or the Trust.
6. In consideration of the services and facilities described
herein, Bank shall receive from Distributors on behalf of the Trust an
annual service fee, payable at such intervals as may be agreed upon by the
parties of a percentage of the aggregate average net asset value of the
Shares owned beneficially by Bank's clients during each payment period. We
understand that this Agreement and the payment of such service fees has
been authorized and approved by the Board of Trustees of the Trust and is
subject to limitations imposed by the National Association of Securities
Dealers, Inc. In cases where Distributor has advanced payments to Bank of
the first year's fee for shares sold with a contingent deferred sales
charge, no payments will be made to Bank during the first year the subject
Shares are held.
7. The Trust reserves the right, at its discretion and without
notice, to suspend the sale of any Shares or withdraw the sale of Shares.
8. Bank understands that Distributors reserves the right to
amend this Agreement or Schedule A hereto at any time without Bank's
consent by mailing a copy of an amendment to Bank at the address set forth
below. Such amendment shall become effective on the date specified in such
amendment unless Bank elects to terminate this Agreement within thirty
(30) days of Bank's receipt of such amendment.
9. This Agreement may be terminated at any time by
Distributors on not less than 15 days' written notice to Bank at its
principal place of business. Bank, on 15 days' written notice addressed to
Distributors at its principal place of business, may terminate this
Agreement, said termination to become effective on the date of mailing
notice to Bank of such termination. Distributor's failure to terminate for
any cause shall not constitute a waiver of Distributor's right to
terminate at a later date for any such cause. This Agreement shall
terminate automatically in the event of its assignment, the term
"assignment" for this purpose having the meaning defined in Section 2 (a)
(4) of the Investment Company Act of 1940, as amended.
<PAGE>
10. All communications to Distributors shall be sent to it at
101 Park Avenue, New York, NY 10178. Any notice to Bank shall be duly
given if mailed or telegraphed to Bank at this address shown on this
Agreement.
11. This Agreement shall become effective as of the date when
it is executed and dated below by Distributors. This Agreement and all
rights and obligations of the parties hereunder shall be governed by and
construed under the laws of the State of New York.
12. This Agreement shall be construed in accordance with the
laws of the State of New York.
Vista Fund Distributors, Inc.
Date: __________________________ By: ___________________________
The undersigned agrees to abide by the foregoing terms and conditions.
Date: _________________________ By: ___________________________
Signature
---------------------------
Name Title
---------------------------
Bank's Name
---------------------------
Address
---------------------------
City/State/Zip
Please sign both copies and return one copy of each to:
Vista Fund Distributors, Inc.
101 Park Avenue
New York, NY 10178
Attn:________________
<PAGE>
EXHIBIT B
SHAREHOLDER SERVICE AGREEMENT
FOR SALE OF CLASS C SHARES
This Shareholder Service Agreement (the "Agreement") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act") by each of the mutual funds (or designated classes of such funds)
listed on Schedule A to this Agreement (the "Funds"), under a Distribution Plan
(the "Plan") adopted pursuant to such Rule. This Agreement, between Vista Fund
Distributors, Inc, ("Distributors"), solely as agent for the Funds, and the
undersigned authorized dealer ("Dealer") defines the services to be provided by
Dealer for which it is to receive payments pursuant to the Plan adopted by each
of the Funds. The Plan and the Agreement have been approved by a majority of the
directors or trustees of each of the Funds, including a majority of the
directors who are not interested persons of such Funds, and who have no direct
or indirect financial interest in the operation of the Plan or related
agreements (the "Non-interested Directors"), by votes cast in person at a
meeting called for the purpose of voting on the Plan. Such approval included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit such Fund and its shareholders.
1. To the extent that Dealer provides distribution-related
continuing personal shareholder services to customers who may, from time
to time, directly or beneficially own Class C shares of the Funds,
including but not limited to, distributing sales literature, answering
routine customer inquiries regarding the Funds, assisting customers in
changing dividend options, accounting designation and addresses, and in
enrolling into any of several special investment plans offered in
connection with the purchase of the Funds' shares, assisting in the
establishment and maintenance of customer accounts and records and in the
processing of purchase and redemption transactions, investing dividends
and capital gains distributions automatically in shares and providing such
other services as the Funds or the customer may reasonably request,
Distributor solely as agent for the Funds, shall pay Dealer a fee
periodically or arrange for such fee to be paid to Dealer.
2. The fee paid with respect to each Fund will be calculated
at the end of each payment period (as indicated in Schedule A) at the
annual rate set forth in Schedule A as applied to the average net asset
value of the Class C Shares of such Fund purchased or acquired through
exchange on or after the Plan Calculation Date shown for such Fund on
Schedule A. Fees calculated in this manner shall be paid to Dealer only if
Dealer is the dealer of record at the close of business on the last
business day of the applicable payment period, for the account in which
such Class C Shares are held. In cases where Distributors has advanced
payment to Dealer of the first year's fee for shares sold subject to a
contingent deferred sales charge, no additional payments will be made to
Dealer during the first year the Class C Shares are held.
<PAGE>
3. Distributors reserve the right to withhold payment with
respect to the Class C Shares purchased by Dealer and redeemed or
repurchased by the Fund or by Distributor as Agent within fifteen (15)
business days after the date of Distributors' confirmation of such
purchase. Distributors reserve the right at any time to impose minimum fee
payment requirements before any periodic payments will be made to Dealer
hereunder.
4. Dealer shall furnish Distributors and the Funds with such
information as shall reasonably be requested either by the directors of
the Funds or by Distributors with respect to the fees paid to Dealer
pursuant to this Agreement.
5. Distributors shall furnish the directors of the Funds, for
their review on a quarterly basis, a written report of the amounts
expended under the Plan by Distributors and the purposes for which such
expenditures were made.
6. Neither Dealer nor any of its employees or agents are
authorized to make any representation concerning shares of the Funds
except those contained in the then current Prospectus for the Funds, and
Dealer shall have no authority to act as agent for the Funds or for
Distributors.
7. Distributors may enter into other similar Shareholder
Service Agreements with any other person without Dealer's consent.
8. This Agreement and Schedule A may be amended at any time
without your consent by Distributors mailing a copy of an amendment to you
at the address set forth below. Such amendment shall become effective on
the date specified in such amendment unless you elect to terminate this
Agreement within thirty (30) days of your receipt of such amendment.
9. This Agreement may be terminated with respect to any Fund
at any time without payment of any penalty by the vote of a majority of
the directors of such Fund who are Non-interested Directors or by a vote
of a majority of the Fund's outstanding shares, on sixty (60) days'
written notice. It will be terminated by any act which terminates either
the Fund's Distribution Agreement with Distributors or the Fund's
Distribution Plan, and in any event, it shall terminate automatically in
the event of its assignment as that term is defined in the 1940 Act.
10. The provisions of the Distribution Agreement between any
Fund and Distributors, insofar as they relate to the Plan, are
incorporated herein by reference. This Agreement shall become effective
upon execution and delivery hereof and shall continue in full force and
effect as long as the continuance of the Plan and this related Agreement
are approved at least annually by a vote of the directors, including a
majority of the Non-interested Directors, cast in person at a meeting
called for the purpose of voting thereon. All communications to
Distributors should be sent to the address shown at the bottom of this
Agreement. Any notice to Dealer shall be duly given if mailed or
telephoned to you at the address specified by Dealer below.
<PAGE>
11. Dealer represents that it provides to customers who own
shares of the Funds personal services as defined from time to time in
applicable regulations of the National Association of Securities Dealers,
Inc. and that Dealer will continue to accept payments under this Agreement
only so long as Dealer provides such services.
12. This Agreement shall be construed in accordance with the
laws of the State of New York.
Vista Fund Distributors, Inc.
Date: __________________________ By: __________________________
The undersigned agrees to abide by the foregoing terms and conditions.
Date: __________________________ By: ___________________________
Signature
---------------------------
Name
Title
---------------------------
Dealer's Name
---------------------------
Address
---------------------------
City/State/Zip
Please sign both copies and return one copy of each to:
Vista Fund Distributors, Inc.
101 Park Avenue
New York, NY 10178
Attn:________________
MUTUAL FUND GROUP
MUTUAL FUND TRUST
MUTUAL FUND VARIABLE ANNUITY TRUST
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
CAPITAL GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian and Lee Schultheis and each of them, with full powers of
substitution as her true and lawful attorneys and agents to execute in her name
and on her behalf in any and all capacities any and all amendments to the
Registration Statement on Form N-1A filed by Mutual Fund Group, Mutual Fund
Trust, Mutual Fund Variable Annuity Trust, Mutual Fund Select Group, Mutual Fund
Select Trust, Capital Growth Portfolio, Growth and Income Portfolio or
International Equity Portfolio (the "Trusts") with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, and any and all
instruments which such attorneys and agents, or any of them, deem necessary or
advisable to enable the Trusts to comply with such Acts, the rules, regulations
and requirements of the Securities and Exchange Commission, and the securities
or Blue Sky laws of any state or other jurisdiction and the undersigned hereby
ratifies and confirms as her own act and deed any and all that such attorneys
and agents, or any of them, shall do or cause to be done by virtue hereof. Any
one of such attorneys and agents have, and may exercise, all of the powers
hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 24th
day of October, 1997.
/s/ Sarah E. Jones
---------------------
Sarah E. Jones
<PAGE>
MUTUAL FUND GROUP
MUTUAL FUND TRUST
MUTUAL FUND VARIABLE ANNUITY TRUST
MUTUAL FUND SELECT GROUP
MUTUAL FUND SELECT TRUST
CAPITAL GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Fergus Reid, III, H.
Richard Vartabedian and Lee Schultheis and each of them, with full powers of
substitution as his true and lawful attorneys and agents to execute in his name
and on his behalf in any and all capacities any and all amendments to the
Registration Statement on Form N-1A filed by Mutual Fund Group, Mutual Fund
Trust, Mutual Fund Variable Annuity Trust, Mutual Fund Select Group, Mutual Fund
Select Trust, Capital Growth Portfolio, Growth and Income Portfolio or
International Equity Portfolio (the "Trusts") with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, and any and all
instruments which such attorneys and agents, or any of them, deem necessary or
advisable to enable the Trusts to comply with such Acts, the rules, regulations
and requirements of the Securities and Exchange Commission, and the securities
or Blue Sky laws of any state or other jurisdiction and the undersigned hereby
ratifies and confirms as his own act and deed any and all that such attorneys
and agents, or any of them, shall do or cause to be done by virtue hereof. Any
one of such attorneys and agents have, and may exercise, all of the powers
hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 24th
day of October, 1997.
/s/ Leonard M. Spalding, Jr.
--------------------------------
Leonard M. Spalding, Jr.
