<PAGE>
As filed with the Securities and Exchange Commission on May 26, 2000
Registration Nos. 2-92665; 811-4088
_________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 38 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [X]
Amendment No. 40 [X]
Excelsior Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
73 Tremont Street
Boston, Massachusetts 02108-3913
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 446-1012
W. Bruce McConnel, III
Drinker Biddle & Reath LLP
One Logan Square
18/th/ and Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(Name and Address of Agent for Service)
It is proposed that this post-effective amendment will become effective (check
appropriate box)
[_] Immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXCELSIOR FUNDS, INC.
Institutional Shares
PROSPECTUS
August 1, 2000
MONEY FUND
GOVERNMENT MONEY FUND
Investment Adviser
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY
The Securities and Exchange Commission has not
approved or disapproved these securities or
passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Page 1 of 27
<PAGE>
Table of Contents
Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals and strategies.
This prospectus gives you important information about the Institutional Shares
of the Money Fund and Government Money Fund (each, a Fund) that you should know
before investing, although Institutional Shares of the Government Money Fund are
not currently offered. Please read this prospectus and keep it for future
reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about the Funds, please see:
<TABLE>
<CAPTION>
Page
<S> <C>
MONEY FUND.........................................................................XX
GOVERNMENT MONEY FUND..............................................................XX
MORE INFORMATION ABOUT RISK........................................................XX
MORE INFORMATION ABOUT FUND INVESTMENTS............................................XX
THE INVESTMENT ADVISER.............................................................XX
PURCHASING, SELLING AND EXCHANGING FUND SHARES.....................................XX
DIVIDENDS AND DISTRIBUTIONS........................................................XX
TAXES..............................................................................XX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR FUNDS................................................................Back Cover
</TABLE>
Page 2 of 27
<PAGE>
INTRODUCTION - RISK/RETURN INFORMATION COMMON TO ALL FUNDS
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help a
Fund achieve its goal. Still, investing in each Fund involves risk and there is
no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. A Fund share is not a bank
deposit and it is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.
The Funds try to maintain a constant price per share of $1.00, but there is no
guarantee that a Fund will achieve this goal.
Page 3 of 27
<PAGE>
Money Fund
Fund Summary
<TABLE>
<CAPTION>
<S> <C>
Investment Goal Current income consistent with preserving capital and
maintaining liquidity
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a portfolio of high quality short-term debt
securities designed to allow the Fund to maintain a stable
net asset value per share
Investor Profile Conservative investors seeking current income from their
investment
</TABLE>
Investment Objective
The Money Fund seeks as high a level of current income as is consistent with
liquidity and stability of principal.
Investment Strategy of the Money Fund
The Money Fund invests substantially all of its assets in high quality U.S.
dollar-denominated money market instruments, such as bank certificates of
deposit, bankers' acceptances, commercial paper, corporate debt, mortgage-backed
securities, obligations issued or guaranteed by the U.S. government and its
agencies and instrumentalities and fully collateralized repurchase agreements.
In managing the Fund, the Adviser assesses current and projected market
conditions, particularly interest rates. Based on this assessment, the Adviser
uses gradual shifts in portfolio maturity to respond to expected changes and
selects securities that it believes offer the most attractive risk/return trade
off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments as to maturities, issuers and providers of
credit support.
Principal Risks of Investing in the Money Fund
Page 4 of 27
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changing interest rates.
Performance Information
Institutional Shares of the Fund have less than one calendar year's performance.
For this reason, the performance information shown below is for the Fund's other
class of shares (shares) that is not offered in this prospectus. The Fund's
Institutional Shares and shares would have substantially similar annual returns,
because both share classes are invested in the same portfolio of securities.
Annual returns will differ only to the extent that Institutional Shares and
shares do not have the same expenses. In reviewing this performance
information, however, you should be aware that shares have a 0.40% (annualized)
Administrative Servicing Fee, while Institutional Shares have a 0.15%
(annualized) Administrative Servicing Fee. If the expenses of the Institutional
Shares were reflected, performance would be higher.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the past performance of
shares of the Fund does not necessarily indicate how the Fund will perform in
the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
<TABLE>
<S> <C>
1990 8.14%
1991 6.01%
1992 3.96%
1993 2.83%
1994 3.91%
1995 5.60%
1996 5.02%
</TABLE>
Page 5 of 27
<PAGE>
<TABLE>
<S> <C>
1997 5.21%
1998 5.16%
1999 X.XX%
</TABLE>
<TABLE>
<S> <C>
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
This table shows the average annual total returns of the Fund's shares for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>
Call 1-800-861-3430 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Institutional shares of the Fund.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
Institutional Shares
- -------------------------------------------------------------------------------
<S> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- -------------------------------------------------------------------------------
</TABLE>
Page 6 of 27
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- -------------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period of
one year from the date of this prospectus. For more information about these
fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated and that you sell your shares at the end
of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in Institutional Shares of the Fund would
be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$XXX $XXX $XXX $XXX
</TABLE>
Page 7 of 27
<PAGE>
Government Money Fund
Fund Summary
<TABLE>
<CAPTION>
<S> <C>
Investment Goal Current income consistent with preserving capital and
maintaining liquidity
Investment Focus Money market instruments issued or guaranteed by the U.S.
government, its agencies and instrumentalities
Share Price Volatility Very low
Principal Investment Strategy Investing in a portfolio of high quality short-term debt
securities issued by the U.S. government, its agencies
and instrumentalities designed to allow the Fund to
maintain a stable net asset value per share
Investor Profile Conservative investors seeking current income from their
investment
</TABLE>
Investment Objective
The Government Money Fund seeks as high a level of current income as is
consistent with liquidity and stability of principal.
Investment Strategy of the Government Money Fund
The Government Money Fund invests substantially all of its assets in high
quality U.S. dollar-denominated money market instruments, including mortgage-
backed securities, issued or guaranteed by the U.S. government, its agencies and
instrumentalities and fully collateralized repurchase agreements. In managing
the Fund, the Adviser assesses current and projected market conditions,
particularly interest rates. Based on this assessment, the Adviser uses gradual
shifts in portfolio maturity to respond to expected changes and selects
securities that it believes offer the most attractive risk/return trade off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments among securities with various maturities.
Principal Risks of Investing in the Government Money Fund
Page 8 of 27
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.
The Fund's U.S. government securities are not guaranteed against price movements
due to changing interest rates. Obligations issued by some U.S. government
agencies are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changing interest rates.
Performance Information
Institutional Shares of the Fund have not yet commenced operations. For this
reason, the performance information shown below is for the Fund's other class of
shares (shares) that is not offered in this prospectus. The Fund's
Institutional Shares and shares would have substantially similar annual returns,
because both share classes are invested in the same portfolio of securities.
Annual returns will differ only to the extent that Institutional Shares and
shares do not have the same expenses. In reviewing this performance
information, however, you should be aware that shares have a 0.40% (annualized)
Administrative Servicing Fee, while Institutional Shares have a 0.15%
(annualized) Administrative Servicing Fee. If the expenses of the Institutional
Shares were reflected, performance would be higher.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the past performance of
shares of the Fund does not necessarily indicate how the Fund will perform in
the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
1990 7.98%
Page 9 of 27
<PAGE>
1991 5.80%
1992 3.95%
1993 2.77%
1994 3.83%
1995 5.54%
1996 4.99%
1997 5.09%
1998 5.15%
1999 X.XX%
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
This table shows the Fund's average annual total returns of the Fund's shares
for the periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>
Call 1-800-861-3430 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Institutional shares of the Fund.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
Institutional Shares
- --------------------------------------------------------------------------------
<S> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- --------------------------------------------------------------------------------
</TABLE>
Page 10 of 27
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- --------------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive its fees and reimburse expenses
in order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about these
fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in
Institutional Shares of the Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in Institutional Shares of
the Fund for the time periods indicated and that you sell your shares at the end
of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in Institutional Shares of the Fund would
be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$XXX $XXX $XXX $XXX
</TABLE>
Page 11 of 27
<PAGE>
More Information About Risk
Fixed Income Risk - The market value of fixed income investments All Funds
change in response to interest rate changes and other factors.
During periods of falling interest rates, the values of
outstanding fixed income securities generally rise. Moreover,
while securities with longer maturities tend to produce higher
yields, the prices of longer maturity securities are also
subject to greater market fluctuations as a result of changes in
interest rates.
All Funds
Call Risk - During periods of falling interest rates,
certain debt obligations with high interest rates may be prepaid
(or "called") by the issuer prior to maturity. This may cause a
Fund's average weighted maturity to fluctuate, and may require a
Fund to invest the resulting proceeds at lower interest rates.
All Funds
Credit Risk - The possibility that an issuer will be unable to
make timely payments of either principal or interest.
All Funds
Event Risk - Securities may suffer declines in credit
Page 12 of 27
<PAGE>
quality and market value due to issuer restructurings or other
factors. This risk should be reduced because of the Fund's
multiple holdings.
Page 13 of 27
<PAGE>
Mortgage-Backed Securities - Mortgage-backed securities are All Funds
fixed income securities representing an interest in a pool
of underlying mortgage loans. They are sensitive to changes
in interest rates, but may respond to these changes
differently from other fixed income securities due to the
possibility of prepayment of the underlying mortgage loans.
As a result, it may not be possible to determine in advance
the actual maturity date or average life of a
mortgage-backed security. Rising interest rates tend to
discourage refinancings, with the result that the average
life and volatility of the security will increase,
exacerbating its decrease in market price. When interest
rates fall, however, mortgage-backed securities may not gain
as much in market value because of the expectation of
additional mortgage prepayments that must be reinvested at
lower interest rates. Prepayment risk may make it difficult
to calculate the average maturity of a portfolio of
mortgage-backed securities and, therefore, to assess the
volatility risk of that portfolio.
Page 14 of 27
<PAGE>
More Information About Fund Investments
In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information. Of course, a Fund cannot guarantee that it will achieve
its investment goal.
Investment Adviser
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.
On January 13, 2000, The Charles Schwab Corporation ("Schwab") and U.S. Trust
Corporation announced that they had signed an agreement to merge (the "Merger").
The Merger is subject to the approval of U.S. Trust Corporation shareholders and
is expected to close in the second quarter of 2000. Under the terms of the
agreement, U.S. Trust Corporation will retain its name and continue to provide
investment management, fiduciary, financial planning and private banking
services. As a result, U.S. Trust will continue to serve as the investment
adviser to the Funds. The Merger, however, will represent a change of ownership
of the Adviser's parent corporation and, as such, will have the effect under the
Investment Company Act of 1940 of terminating the existing advisory agreements
between Excelsior Funds, Inc. and the Adviser.
As a consequence of the Merger and in order to facilitate the investment
management of the Funds, the Board of Directors of Excelsior Funds, Inc.
approved a new advisory agreement with the Adviser on March 3, 2000. The new
advisory agreement was subsequently approved by a vote of shareholders of the
Funds at a meeting held on May 3, 2000. The new advisory agreement will become
effective on the date of the Merger.
U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. On December 31, 1999,
U.S. Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W. 47th
Street, New York, NY 10036. U.S. Trust Company has its principal offices at 225
High Ridge Road, East Building, Stamford, CT 06905.
The Adviser makes investment decisions for each Fund and continuously reviews,
supervises and administers each Fund's investment program.
Page 15 of 27
<PAGE>
The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.
For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:
<TABLE>
<S> <C>
Money Fund [0.20%]
Government Money Fund [0.22%]
</TABLE>
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange Institutional Shares of the Funds.
Institutional Shares
. No sales charge
. No 12b-1 fees
. No minimum initial or subsequent investment
Institutional Shares are offered only to financial institutions investing for
their own or their customers' accounts. For information on how to open an
account and set up procedures for placing transactions call (800) 909-1989 (from
overseas, call (617) 557-1755). Customers of financial institutions should
contact their institutions for information on their accounts.
How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
. Telephone, or
. Wire
To purchase shares directly from us, please call (800) 909-1989 (from overseas,
call (617) 557-1755), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire, write your check, payable in
U.S. dollars, to "Excelsior Funds" and include the name of the appropriate
Fund(s) on the check. A Fund cannot accept third-party checks, credit card
checks or cash. To purchase shares by wire, please call us for instructions.
Federal funds and registration instructions should be wired through the Federal
Reserve System to:
Page 16 of 27
<PAGE>
The Chase Manhattan Bank
ABA #021000021
Excelsior Funds
Credit DDA 910-2-733046
[Account Registration]
[Account Number]
[Wire Control Number]
Investors making initial investments by wire must promptly complete the enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures. Your broker or institution may charge a fee for its services, in
addition to the fees charged by the Fund. You will also generally have to
address your correspondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.
Page 17 of 27
<PAGE>
General Information
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). A Fund may reject any
purchase request if it is determined that accepting the request would not be in
the best interests of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good order.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received.
Each Fund calculates its NAV twice each Business Day at 3:00 p.m., Eastern time
and at the regularly-scheduled close of normal trading on the NYSE (normally,
4:00 p.m., Eastern time). For you to be eligible to receive dividends declared
on the day you submit your purchase request, a Fund must receive your request in
good order before 3:00 p.m., Eastern time and federal funds (readily available
funds) before the regularly-scheduled close of normal trading on the NYSE.
How We Calculate NAV
NAV for one Fund share of each class of a Fund is the value of that share's
portion of the net assets of such class of the Fund.
In calculating NAV for the Funds, a Fund generally values its investment
portfolio using the amortized cost valuation method, which is described in
detail in our Statement of Additional Information. If this method is determined
to be unreliable during certain market conditions or for other reasons, a Fund
may value its portfolio at market price or fair value prices may be determined
in good faith using methods approved by the Board of Directors.
How to Sell Your Fund Shares
You may sell shares directly by:
. Mail
. Telephone, or
. By Writing a Check Directly From Your Account
Holders of Institutional Shares may sell (sometimes called "redeem") shares by
following the procedures established when they opened their account or accounts.
If you have questions, call (800) 909-1989 (from overseas, call (617) 557-1755).
Page 18 of 27
<PAGE>
You may sell your shares by sending a written request for redemption to:
Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 909-1989 (from
overseas, call (617) 557-1755). We may reject a telephone redemption request if
we deem it advisable to do so.
If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares by writing
a check for at least $500 drawn on your account. Checks are available free of
charge, and may be obtained by calling (800) 909-1989 (from overseas, call (617)
557-1755). You cannot use a check to close your account.
The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.
Receiving Your Money
Normally, we will send your sale proceeds the next Business Day after we receive
your redemption request in good order. Your proceeds can be wired to your bank
account or sent to you by check. If you recently purchased your shares by
check, redemption proceeds may not be available until your check has cleared
(which may take up to 15 days from your date of purchase).
Page 19 of 27
<PAGE>
Redemptions in Kind
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes on
any capital gains from the sale as with any redemption.
Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be
required to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
Page 20 of 27
<PAGE>
Suspension of Your Right to Sell Your Shares
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.
Page 21 of 27
<PAGE>
How to Exchange Your Shares
You may exchange your shares on any Business Day for Institutional Shares of any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or
by telephone if you previously selected the telephone exchange option on the
account application.
If you recently purchased shares by check, you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your date
of purchase). This exchange privilege may be changed or canceled at any time.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.
Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards
and procedures to confirm the identity of callers and the authenticity of
instructions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.
Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund shares.
These intermediaries may authorize other organizations to accept purchase,
redemption and exchange requests for Fund shares. These requests are normally
executed at the NAV next determined after the intermediary receives the request
in good order. Authorized intermediaries are responsible for transmitting
requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay a shareholder servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.15% of the average
daily net asset value of Fund shares held by clients of a shareholder
organization.
Page 22 of 27
<PAGE>
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying
accumulated dividends monthly.
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends
and distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.
Taxes
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (the excess of long-term
capital gain over short-term capital loss), if any. It is anticipated that all,
or substantially all, of the distributions by the Funds will be taxable as
ordinary income. You will be subject to income tax on Fund distributions
regardless whether they are paid in cash or reinvested in additional shares.
The one major exception to these tax principles is that distributions on shares
held in an IRA (or other tax-qualified plan) will generally not be currently
taxable.
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates,
Page 23 of 27
<PAGE>
or foreign corporations or partnerships, may be subject to different United
States federal income tax treatment. You should consult your tax adviser for
further information regarding federal, state, local and/or foreign tax
consequences relevant to your specific situation.
More information about taxes is in the Statement of Additional Information.
Page 24 of 27
<PAGE>
Excelsior Funds, Inc.
Investment Adviser
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036
U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905
Distributor
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
More information about each Fund is available without charge through the
following:
Statement of Additional Information (SAI)
Page 25 of 27
<PAGE>
The SAI dated August 1, 2000 includes detailed information about Excelsior
Funds, Inc. The SAI is on file with the SEC and is incorporated by reference
into this prospectus. This means that the SAI, for legal purposes, is a part of
this prospectus.
Annual and Semi-Annual Reports
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, recent market conditions and trends.
To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 909-1989 (from overseas, call (617) 557-1755)
By Mail:
Excelsior Funds
73 Tremont Street
Boston, Massachusetts 02108-3913
By Internet: http://www.excelsiorfunds.com
Page 26 of 27
<PAGE>
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual
reports, as well as other information about Excelsior Funds, Inc., from the
EDGAR Database on the SEC's website ("http://www.sec.gov"). You may review and
------------------
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-942-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-0102. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
[email protected]. Excelsior Funds, Inc.'s Investment Company Act registration
- ------------------
number is 811-4088.
Page 27 of 27
<PAGE>
Excelsior Funds, Inc.
Excelsior Tax-Exempt Funds, Inc.
Money Fund
Government Money Fund
Treasury Money Fund
Tax-Exempt Money Fund
New York Tax-Exempt Money Fund
Prospectus
August 1, 2000
Investment Adviser
United States Trust Company of New York
U.S. Trust Company
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus.
Page 1 of 52
<PAGE>
Any representation to the contrary is a criminal offense.
Page 2 of 52
<PAGE>
Table of Contents
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. are mutual fund
families that offer shares in separate investment portfolios which have
individual investment goals and strategies. This prospectus gives you important
information about the Money, Government Money and Treasury Money Funds of
Excelsior Funds, Inc. and the Tax-Exempt Money and New York Tax-Exempt Money
Funds of Excelsior Tax-Exempt Funds, Inc. (each, a Fund) that you should know
before investing. The Money Fund and Government Money Fund offer two classes of
shares: shares, which are offered in this prospectus, and Institutional Shares,
which are offered in a separate prospectus. Institutional Shares of the
Government Money Fund are not currently offered. Please read this prospectus
and keep it for future reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:
<TABLE>
<CAPTION>
Page
<S> <C>
Money Fund...............................................XXX
Government Money Fund....................................XXX
Treasury Money Fund......................................XXX
Tax-Exempt Money Fund....................................XXX
New York Tax-Exempt Money Fund...........................XXX
More Information About Risk..............................XXX
More Information About Fund Investments..................XXX
The Investment Adviser...................................XXX
Purchasing, Selling and Exchanging Fund Shares...........XXX
Dividends and Distributions..............................XXX
Taxes....................................................XXX
Financial Highlights.....................................XXX
How to Obtain More Information About Excelsior Funds.....Back Cover
</TABLE>
Page 3 of 52
<PAGE>
INTRODUCTION - RISK/RETURN INFORMATION COMMON TO ALL FUNDS
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal and strategies for reaching that goal.
The investment managers invest Fund assets in a way that they believe will help
a Fund achieve its goal. Still, investing in each Fund involves risk and there
is no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and it is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.
The Funds try to maintain a constant price per share of $1.00, but there is no
guarantee that a Fund will achieve this goal.
Page 4 of 52
<PAGE>
Money Fund
<TABLE>
<CAPTION>
Fund Summary
<S> <C>
Investment Goal Current income consistent with preserving capital and
maintaining liquidity
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a portfolio of high quality short-term debt
securities designed to allow the Fund to maintain a stable
net asset value per share
Investor Profile Conservative investors seeking current income from their
investment
</TABLE>
Investment Objective
The Money Fund seeks as high a level of current income as is consistent with
liquidity and stability of principal.
Investment Strategy of the Money Fund
The Money Fund invests substantially all of its assets in high quality U.S.
dollar-denominated money market instruments, such as bank certificates of
deposit, bankers' acceptances, commercial paper, corporate debt, mortgage-backed
securities, obligations issued or guaranteed by the U.S. government, and its
agencies and instrumentalities and fully collateralized repurchase agreements.
In managing the Fund, the Adviser assesses current and projected market
conditions, particularly interest rates. Based on this assessment, the Adviser
uses gradual shifts in portfolio maturity to respond to expected changes and
selects securities that it believes offer the most attractive risk/return trade
off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments as to maturities, issuers and providers of
credit support.
Principal Risks of Investing in the Money Fund
Page 5 of 52
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changing interest rates.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
<TABLE>
<S> <C>
1990 8.14%
1991 6.01%
1992 3.96%
1993 2.83%
1994 3.91%
1995 5.60%
1996 5.02%
1997 5.21%
1998 5.16%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C> <C>
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
Page 6 of 52
<PAGE>
This table shows the average annual total returns of the Fund's shares for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Page 7 of 52
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
<TABLE>
<S> <C>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period of
one year from the date of this prospectus. For more information about these
fees, see "Investment Adviser."
</TABLE>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return. Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 8 of 52
<PAGE>
GOVERNMENT MONEY FUND
Fund Summary
Investment Goal Current income consistent with
preserving capital and maintaining
liquidity
Investment Focus Money market instruments issued or
guaranteed by the U.S. government, its
agencies and instrumentalities
Share Price Volatility Very low
Principal Investment Strategy Investing in a portfolio of high
quality short-term debt securities
issued by the U.S. government, its
agencies and instrumentalities
designed to allow the Fund to maintain
a stable net asset value per share
Investor Profile Conservative investors seeking current
income from their investment
Investment Objective
The Government Money Fund seeks as high a level of current income as is
consistent with liquidity and stability of principal.
Investment Strategy of the Government Money Fund
The Government Money Fund invests substantially all of its assets in high
quality U.S. dollar-denominated money market instruments, including mortgage-
backed securities, issued or guaranteed by the U.S. government, its agencies and
instrumentalities and fully collateralized repurchase agreements. In managing
the Fund, the Adviser assesses current and projected market conditions,
particularly interest rates. Based on this assessment, the Adviser uses gradual
shifts in portfolio maturity to respond to expected changes and selects
securities that it believes offer the most attractive risk/return trade off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments among securities with various maturities.
Principal Risks of Investing in the Government Money Fund
Page 9 of 52
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.
The Fund's U.S. government securities are not guaranteed against price movements
due to changing interest rates. Obligations issued by some U.S. government
agencies are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changing interest rates.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
<TABLE>
<S> <C>
1990 7.98%
1991 5.80%
1992 3.95%
1993 2.77%
1994 3.83%
1995 5.54%
1996 4.99%
1997 5.09%
1998 5.15%
1999 X.XX%
BEST QUARTER WORST QUARTER
</TABLE>
Page 10 of 52
<PAGE>
<TABLE>
<S> <C> <C>
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table shows the average annual total returns of the Fund's shares for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Fund (Shares) X.XX% X.XX% X.XX%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Page 11 of 52
<PAGE>
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
</TABLE>
Page 12 of 52
<PAGE>
<TABLE>
<S> <C> <C> <C>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 13 of 52
<PAGE>
TREASURY MONEY FUND
Fund Summary
<TABLE>
<S> <C>
Investment Goal Current income consistent with preserving capital and
maintaining liquidity
Investment Focus U.S. Treasury securities
Share Price Volatility Very low
Principal Investment Strategy Investing in a portfolio of short-term obligations of the
U.S. Treasury designed to allow the Fund to maintain a
stable net asset value per share
Investor Profile Conservative investors seeking current income from their
investment that is generally exempt from state and local
taxes
</TABLE>
Investment Objective
The Treasury Money Fund seeks current income with liquidity and stability of
principal.
Investment Strategy of the Treasury Money Fund
The Treasury Money Fund invests substantially all of its assets in U.S. Treasury
obligations. The Fund also may invest, to a lesser extent, in high quality
obligations issued or guaranteed by U.S. government agencies and
instrumentalities. Generally, interest payments on obligations held by the Fund
will be exempt from state and local taxes. In managing the Fund, the Adviser
assesses current and projected market conditions, particularly interest rates.
Based on this assessment, the Adviser uses gradual shifts in portfolio maturity
to respond to expected changes and selects securities that it believes offer the
most attractive risk/return trade off.
The Fund invests only in money market instruments with a remaining maturity of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted remaining maturity of 90 days or less and
broadly diversifies its investments among securities with various maturities.
Principal Risks of Investing in the Treasury Money Fund
Page 14 of 52
<PAGE>
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.
The Fund's U.S. Government securities are not guaranteed against price movements
due to changing interest rates. Obligations issued by some U.S. government
agencies are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<S> <C>
1992 3.68%
1993 2.66%
1994 3.61%
1995 5.27%
1996 4.81%
1997 4.89%
1998 4.82%
1999 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
Page 15 of 52
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Money Fund X.XX% X.XX% X.XX%
</TABLE>
* Since February 13, 1991
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Page 16 of 52
<PAGE>
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Page 17 of 52
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 18 of 52
<PAGE>
TAX-EXEMPT MONEY FUND
Fund Summary
<TABLE>
<S> <C>
Investment Goal Current income exempt from federal taxes consistent with
preserving capital
Investment Focus Municipal money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a portfolio of high quality short-term debt
securities which pay interest exempt from federal taxes
designed to allow the Fund to maintain a stable net asset
value per share
Investor Profile Conservative taxable investors in higher tax brackets
seeking current income exempt from federal income taxes
</TABLE>
Investment Objective
The Tax-Exempt Money Fund seeks a moderate level of current interest income
exempt from federal income taxes consistent with stability of principal.
Investment Strategy of the Tax-Exempt Money Fund
The Tax-Exempt Money Fund invests substantially all of its assets in high
quality money market instruments issued by state and local governments and
agencies, and other U.S. territories and possessions, that pay interest exempt
from federal taxes ("municipal money market instruments"). Banks and other
creditworthy entities may provide letters of credit and other credit
enhancements as to municipal money market instruments. Such institutions may
also provide liquidity facilities that shorten the effective maturity of some of
the Fund's holdings. The Fund ordinarily will not invest in obligations that
pay interest treated as a preference item for purposes of the alternative
minimum tax. The Fund invests only in instruments with remaining maturities of
13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted maturity of 90 days or less.
Page 19 of 52
<PAGE>
In managing the Fund, the Adviser assesses current and projected market
conditions, particularly interest rates. Based on this assessment and an
extensive credit analysis, the Adviser uses gradual shifts in portfolio maturity
to respond to expected changes in interest rates and selects securities that it
believes offer the most attractive risk/return trade off.
Principal Risks of Investing in the Tax-Exempt Money Fund
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<S> <C>
1990 5.56%
1991 4.34%
1992 3.02%
1993 1.98%
1994 2.46%
1995 3.53%
</TABLE>
Page 20 of 52
<PAGE>
<TABLE>
<S> <C>
1996 3.11%
1997 3.25%
1998 3.09%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
<S> <C> <C>
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Fund X.XX% X.XX% X.XX%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Page 21 of 52
<PAGE>
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and
hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)*
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
</TABLE>
Page 22 of 52
<PAGE>
<TABLE>
<S> <C> <C> <C>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 23 of 52
<PAGE>
NEW YORK TAX-EXEMPT MONEY FUND
Fund Summary
<TABLE>
<S> <C>
Investment Goal Current income exempt from federal, New York State and New
York City taxes consistent with preserving capital and
maintaining liquidity
Investment Focus New York tax-exempt money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a portfolio of high quality short-term debt
securities which pay interest exempt from federal, New York
State and New York City taxes designed to allow the Fund to
maintain a stable net asset value per share
Investor Profile Conservative investors in higher tax brackets seeking
current income that is exempt from federal, New York State
and New York City income taxes
</TABLE>
Investment Objective
The New York Tax-Exempt Money Fund seeks a moderate level of current interest
income that is exempt from federal income tax and, to the extent possible, from
New York State and New York City personal income taxes, as is consistent with
liquidity and stability of principal. This objective may be changed without
shareholder approval.
Investment Strategy of the New York Tax-Exempt Money Fund
The New York Tax-Exempt Money Fund invests substantially all of its assets in
high quality money market instruments issued by the State of New York, local
governments and agencies in
Page 24 of 52
<PAGE>
New York and other governmental issuers including U.S. territories and
possessions that pay interest exempt from federal, New York State and New York
City income taxes ("New York money market instruments"). Banks and other
creditworthy entities may provide letters of credit and other credit
enhancements for New York money market instruments. Such institutions may also
provide liquidity facilities that shorten the effective maturity of some of the
Fund's holdings. The Fund invests only in instruments with remaining maturities
of 13 months or less that the Adviser believes present minimal credit risk. The
Fund maintains an average weighted maturity of 90 days or less.
In managing the Fund, the Adviser assesses current and projected market
conditions, particularly interest rates. Based on this assessment and an
extensive credit analysis, the Adviser uses gradual shifts in portfolio maturity
to respond to expected changes and selects securities that it believes offer the
most attractive risk/return trade off.
Page 25 of 52
<PAGE>
Principal Risks of Investing in the New York Tax-Exempt Money Fund
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise.
An investment in the Fund is subject to income risk, which is the possibility
that the Fund's yield will decline due to falling interest rates. Your
investment is also subject to the risk that the investment return generated by
the Fund may be less than the rate of inflation. A Fund share is not a bank
deposit and is not insured or guaranteed by the FDIC or any government agency.
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in the Fund.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
Since the Fund may purchase securities supported by credit enhancements from
banks and other financial institutions, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or more
of these issuers, and may experience increased volatility due to its investments
in those securities.
The Fund's concentration of investments in securities of issuers located in a
single state subjects the Fund to economic and government policies of that
state. In particular, the Fund's performance depends upon the ability of the
issuers of New York money market instruments to meet their continuing
obligations. New York State and New York City face long-term economic problems
that could seriously affect their ability, and that of other issuers of New York
money market instruments, to meet their financial obligations.
Performance Information
Page 26 of 52
<PAGE>
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
1999 X.XX%
---- -----
<S> <C>
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(X/XX/XX) (X/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table shows the Fund's average annual total returns for the periods ended
December 31,1999.
<TABLE>
<CAPTION>
1 Year
- ---------------------------------------------------------
<S> <C>
New York Tax-Exempt Money Fund X.XX%
</TABLE>
Call 1-800-446-1012 for the Fund's most current 7-day yield.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Page 27 of 52
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)*
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ----------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%/+/
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser."
+ Annualized.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$XXX $XXX $XXX $X,XXX
</TABLE>
Page 28 of 52
<PAGE>
More Information About Risk
Fixed Income Risk - The market value of fixed income All Funds
investments change in response to interest rate changes and
other factors. During periods of falling interest rates,
the values of outstanding fixed income securities generally
rise. Moreover, while securities with longer maturities
tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations
as a result of changes in interest rates.
Call Risk - During periods of falling interest rates, All Funds
certain debt obligations with high interest rates may
be prepaid (or "called") by the issuer prior to
maturity. This may cause a Fund's average weighted
maturity to fluctuate, and may require a Fund to invest
the resulting proceeds at lower interest rates.
Credit Risk - The possibility that an issuer will be unable All Funds
to make timely payments of either principal or interest.
Event Risk - Securities may suffer declines in credit All Funds
quality and market value due to issuer restructurings
or other factors. This risk should be reduced because
of the Fund's multiple holdings.
<TABLE>
<S> <C>
Municipal Issuer Risk - There may be economic or political Tax-Exempt Money Fund
changes that impact the ability of municipal issuers to New York Tax-Exempt Money Fund
repay principal and to make interest payments on municipal
securities. Changes to the financial condition or credit
rating of municipal issuers may also adversely affect the
value of the Funds' municipal securities. Constitutional or
legislative limits
</TABLE>
Page 29 of 52
<PAGE>
on borrowing by municipal issuers may
result in reduced supplies of municipal securities.
Moreover, certain municipal securities are backed only by a
municipal issuer's ability to levy and collect taxes.
<TABLE>
<S> <C>
In addition, the Fund's concentration of investments in New York Tax-Exempt Money Fund
issuers located in a single state makes the Fund more
susceptible to adverse political or economic developments
affecting that state. The Fund also may be riskier than
mutual funds that buy securities of issuers in numerous
states.
</TABLE>
Page 30 of 52
<PAGE>
Page 31 of 52
<PAGE>
<TABLE>
<S> <C>
Mortgage-Backed Securities - Mortgage-backed securities are Money Fund
fixed income securities representing an interest in a pool Government Money Fund
of underlying mortgage loans. They are sensitive to changes
in interest rates, but may respond to these changes
differently from other fixed income securities due to the
possibility of prepayment of the underlying mortgage loans.
As a result, it may not be possible to determine in advance
the actual maturity date or average life of a
mortgage-backed security. Rising interest rates tend to
discourage refinancings, with the result that the average
life and volatility of the security will increase,
exacerbating its decrease in market price. When interest
rates fall, however, mortgage-backed securities may not gain
as much in market value because of the expectation of
additional mortgage prepayments that must be reinvested at
lower interest rates. Prepayment risk may make it difficult
to calculate the average maturity of a portfolio of
mortgage-backed securities and, therefore, to assess the
volatility risk of that portfolio.
</TABLE>
More Information About Fund Investments
In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information. Of course, a Fund cannot guarantee that it will achieve
its investment goal.
Investment Adviser
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.
On January 13, 2000, The Charles Schwab Corporation ("Schwab") and U.S. Trust
Corporation announced that they had signed an agreement to merge (the "Merger").
The Merger is subject to the approval of U.S. Trust Corporation shareholders and
is expected to close in the second quarter of 2000. Under the terms of the
agreement, U.S. Trust Corporation will retain its name and continue to provide
investment management, fiduciary, financial planning and private banking
services. As a result, U.S. Trust will continue to serve as the investment
adviser to the Funds. The Merger, however, will represent a change of ownership
of the Adviser's parent corporation and, as such, will have the effect under the
Investment Company Act of 1940 of terminating the existing advisory agreements
between Excelsior Funds, Inc. and the Adviser and between Excelsior Tax-Exempt
Funds, Inc. and the Adviser.
Page 32 of 52
<PAGE>
As a consequence of the Merger and in order to facilitate the investment
management of the Funds, the Boards of Directors of Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. approved new advisory agreements with the
Adviser on March 3, 2000. The new advisory agreements were subsequently
approved by a vote of shareholders of the Funds at meetings held in May 2000.
The new advisory agreements will become effective on the date of the
Merger.
U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. On December 31, 1999,
U.S. Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W. 47th
Street, New York, NY 10036. U.S. Trust Company has its principal offices at 225
High Ridge Road, East Building, Stamford, CT 06905.
The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.
The Boards of Directors of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
Inc. supervise the Adviser and establish policies that the Adviser must follow
in its management activities.
For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:
<TABLE>
<S> <C>
Money Fund [0.20%]
Government Money Fund [0.22%]
Treasury Money Fund [0.27%]
Tax-Exempt Money Fund [0.19%]
</TABLE>
Page 33 of 52
<PAGE>
New York Tax-Exempt Money Fund [X.XX%]
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to buy, sell (sometimes called "redeem") and exchange
shares of the Funds.
How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
. Telephone
. Wire, or
. Automatic Investment Program
To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire or through the automatic
investment program, write your check, payable in U.S. dollars, to "Excelsior
Funds," and include the name of the appropriate Fund(s) on the check. A Fund
cannot accept third-party checks, credit cards, credit card checks or cash. To
purchase shares by wire, please call us for instructions. Federal funds and
registration instructions should be wired through the Federal Reserve System to:
The Chase Manhattan
ABA
#021000021
Excelsior Funds, Account Number 9102732915
For Further Credit:
To:
Excelsior
Funds
[Wire Control Number]
[Excelsior Funds Account Registration (including account number)]
Page 34 of 52
<PAGE>
Investors making initial investments by wire must promptly complete the enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your broker or institution may charge a fee for its services, in addition to the
fees charged by the Fund. You will also generally have to address your
correspondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.
General Information
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). A Fund may reject any
purchase request if it is determined that accepting the request would not be in
the best interests of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good order.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received.
Each Fund calculates its NAV twice each Business Day at 1:00 p.m., Eastern time
(12:00 noon, Eastern time for the Tax-Exempt Money and New York Tax-Exempt Money
Funds) and at the regularly-scheduled close of normal trading on the NYSE
(normally, 4:00 p.m., Eastern time). For you to be eligible to receive
dividends declared on the day you submit your purchase request, a Fund must
receive your request in good order before 1:00 p.m., Eastern time (12:00 noon,
Eastern time for the Tax-Exempt Money and New York Tax-Exempt Money Funds) and
federal funds (readily available funds) before the regularly-scheduled close of
normal trading on the NYSE.
Page 35 of 52
<PAGE>
How We Calculate NAV
NAV for one Fund share of each class of a Fund is the value of that share's
portion of the net assets of such class of the Fund.
In calculating NAV for the Funds, a Fund generally values its investment
portfolio using the amortized cost valuation method, which is described in
detail in our Statement of Additional Information. If this method is determined
to be unreliable during certain market conditions or for other reasons, a Fund
may value its portfolio at market price or fair value prices may be determined
in good faith using methods approved by the Board of Directors.
Minimum Purchases
To purchase shares for the first time, you must invest at least $500 in any
Fund.
Your subsequent investments in any Fund must be made in amounts of at least $50.
A Fund may accept investments of smaller amounts at its discretion.
Automatic Investment Program
If you have a checking, money market, or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.
With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.
Page 36 of 52
<PAGE>
How to Sell Your Fund Shares
You may sell shares directly by:
. Mail
. Telephone,
. Systematic Withdrawal Plan, or
. By Writing a Check Directly From Your Account
Holders of Fund shares may sell (sometimes called "redeem") shares by following
the procedures established when they opened their account or accounts. If you
have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).
You may sell your shares by sending a written request for redemption to:
Excelsior
Funds
c/o Chase Global Funds Services
Company
P.O. Box
2798
Boston, MA 02208-2798
Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012 (from
overseas, call (617) 557-8280). The minimum amount for telephone redemptions is
$500. We may reject a telephone redemption request if we deem it advisable to
do so.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or
institution may charge a fee for its services, in addition to the fees charged
by the Fund.
If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
Page 37 of 52
<PAGE>
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares by writing
a check for at least $500 drawn on your account. Checks are available free of
charge, and may be obtained by calling (800) 446-1012 (from overseas, call (617)
557-8280). You cannot use a check to close your account.
The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.
Receiving Your Money
Normally, we will send your sale proceeds within five Business Days after we
receive your redemption request in good order. Your proceeds can be wired to
your bank account (if more than $500) or sent to you by check. You can request
to have redemption proceeds wired to your bank account on the same day you call
us to sell your shares, as long as we hear from you by 1:00 p.m., Eastern time
(12:00 noon, Eastern time for the Tax-Exempt Money and New York Tax-Exempt Money
Funds) on that day. Otherwise, redemption proceeds will be wired the next
Business Day. Shares redeemed and wired on the same day will not receive the
dividend declared on that day. If you recently purchased your shares by check,
redemption proceeds may not be available until your check has cleared (which may
take up to 15 days from your date of purchase).
Page 38 of 52
<PAGE>
Redemptions in Kind
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes on
any capital gains from the sale as with any redemption.
Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be
required to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
Suspension of Your Right to Sell Your Shares
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.
How to Exchange Your Shares
You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for shares of any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or
by telephone if you previously selected the telephone exchange option on the
account application.
You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.
If you recently purchased shares by check, you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your date
of purchase). This exchange privilege may be changed or canceled at any time
upon 60 days' notice.
Page 39 of 52
<PAGE>
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.
Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards
and procedures to confirm the identity of callers and the authenticity of
instructions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.
Page 40 of 52
<PAGE>
Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund shares.
These intermediaries may authorize other organizations to accept purchase,
redemption and exchange requests for Fund shares. These requests are normally
executed at the NAV next determined after the intermediary receives the request
in good order. Authorized intermediaries are responsible for transmitting
requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay a shareholder servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.40% of the average
daily net asset value of Fund shares held by clients of a shareholder
organization.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying
accumulated dividends monthly.
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends
and distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice
(0.15% in the case of the Money Fund and Government Money Fund).
Page 41 of 52
<PAGE>
Taxes
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (the excess of long-term
capital gain over short-term capital loss), if any. It is anticipated that all,
or substantially all, of the distributions by the Money Fund, Government Money
Fund and Treasury Money Fund will be taxable as ordinary income. You will be
subject to income tax on these Fund distributions regardless whether they are
paid in cash or reinvested in additional shares. The one major exception to
these tax principles is that distributions on shares held in an IRA (or other
tax-qualified plan) will generally not be currently taxable.
The distributions by the Tax-Exempt Money Fund and the New York Tax-Exempt Money
Fund will generally constitute tax-exempt income for shareholders for federal
income tax purposes. It is possible, depending upon the Funds' investments,
that a portion of these Funds' distributions could be taxable to shareholders as
ordinary income or capital gains, but it is not expected that this will be the
case.
Interest on indebtedness incurred by you to purchase or carry shares of the Tax-
Exempt Money Fund or the New York Tax-Exempt Money Fund generally will not be
deductible for federal income tax purposes.
You should note that a portion of the exempt-interest dividends paid by the Tax-
Exempt Money Fund or the New York Tax-Exempt Money Fund may constitute an item
of tax preference for purposes of determining federal alternative minimum tax
liability. Exempt-interest dividends will also be considered along with other
adjusted gross income in determining whether any Social Security or railroad
retirement payments received by you are subject to federal income taxes.
If you receive an exempt-interest dividend with respect to any share and the
share is held by you for six months or less, any loss on the sale or exchange of
the share will be disallowed to the extent of such dividend amount.
Page 42 of 52
<PAGE>
Shareholders may also be subject to state and local taxes on distributions.
State income taxes may not apply however, to the portions of each Fund's
distributions, if any, that are attributable to interest on federal securities
or interest on securities of the particular state or localities within the
state.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, may
be subject to different United States federal income tax treatment. You should
consult your tax adviser for further information regarding federal, state, local
and/or foreign tax consequences relevant to your specific situation.
More information about taxes is in the Statement of Additional Information.
Page 43 of 52
<PAGE>
Financial Highlights
The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's financial
performance for the past five years, or, if shorter, the period of the Fund's
operations. Some of this information reflects financial information for a
single Fund share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in a Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
_____________, independent public accountants. Their report, along with each
Fund's financial statements, are incorporated by reference into our Statement of
Additional Information. You can obtain the annual report, which contains more
performance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8280).
Page 44 of 52
<PAGE>
Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income 0.04901 0.05139 0.04888 0.05336
Net Gains on Securities (both realized and unrealized) 0.00000 0.00000 0.00000 0.00000
------- ------- ------- -------
Total From Investment Operations 0.04901 0.05139 0.04888 0.05336
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.04901) (0.05139) (0.04888) (0.05336)
Dividends in Excess of Net Investment Income 0.00000/2/ 0.00000 0.00000 0.00000
---------- --------- --------- ---------
Total Distributions (0.04901) (0.05139) (0.04888) (0.05336)
---------- --------- --------- ---------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00
=========== ========= ========= =========
Total Return 5.01% 5.26% 5.00% 5.47%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $973.67 $658.87 $498.07 $394.29
Ratio of Net Operating Expenses to Average Net Assets 0.48% 0.48% 0.47% 0.50%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.52% 0.52% 0.53% 0.53%
Ratio of Net Investment Income to Average Net Assets 4.85% 5.14% 4.89% 5.40%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
</TABLE>
Page 45 of 52
<PAGE>
Government Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income 0.04838 0.05082 0.04862 0.05296
Total From Investment Operations 0.04838 0.05082 0.04862 0.05296
------- ------- ------- --------
Less Distributions
Dividends From Net Investment Income (0.04838) (0.05082) (0.04862) (0.05296)
Dividends in Excess of Net Investment Income 0.00000/2/ 0.00000 0.00000 0.00000
---------- ------- ------- -------
Total Distributions (0.04838) (0.05082) (0.04862) (0.05296)
------- ------- ------- -------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return 4.95% 5.20% 4.97% 5.43%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $641.83 $600.12 $533.83 $461.47
Ratio of Net Operating Expenses to Average Net Assets 0.47% 0.47% 0.47% 0.50%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.50% 0.50% 0.51% 0.53%
Ratio of Net Investment Income to Average Net Assets 4.85% 5.09% 4.86% 5.36%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
</TABLE>
<PAGE>
Treasury Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00
----- ----- ----- ------
Income From Investment Operations
Net Investment Income 0.04543 0.04853 0.04676 0.05043
Net Gains on Securities (both realized and unrealized) 0.00002 0.00000 0.00000 0.00000
------- ------- ------- -------
Total From Investment Operations 0.04545 0.04853 0.04676 0.05043
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.04545) (0.04853) (0.04676) (0.05043)
Dividends in Excess of Net Investment Income 0.00000 0.00000/2/ 0.00000 0.00000
Total Distributions (0.04545) (0.04853) (0.04676) (0.05043)
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00
========= =========== ========= =========
Total Return 4.64% 4.96% 4.78% 5.16%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $494.22 $469.64 $349.09 $258.17
Ratio of Net Operating Expenses to Average Net Assets 0.52% 0.52% 0.52% 0.55%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.55% 0.54% 0.54% 0.57%
Ratio of Net Investment Income to Average Net Assets 4.55% 4.86% 4.68% 5.03%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
</TABLE>
Page 47 of 52
<PAGE>
Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income 0.02911 0.03216 0.03050 0.03362
Total From Investment Operations 0.02911 0.03216 0.03050 0.03362
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.02910) (0.03216) (0.03050) (0.03362)
Dividends in Excess of Net Investment Income (0.00001) 0.00000 0.00000 0.00000
--------- --------- --------- ---------
Total Distributions (0.02911) (0.03216) (0.03050) (0.03362)
--------- --------- --------- ---------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00
========= ========= ========= =========
Total Return 2.95% 3.26% 3.09% 3.41%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $1,503.07 $1,396.53 $1,069.69 $ 966.71
Ratio of Net Operating Expenses to Average Net Assets 0.46% 0.47% 0.47% 0.49%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.52% 0.53% 0.52% 0.53%
Ratio of Net Investment Income to Average Net Assets 2.91% 3.21% 3.05% 3.35%
</TABLE>
<TABLE>
<CAPTION>
Notes:
<S> <C>
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
</TABLE>
Page 48 of 52
<PAGE>
New York Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Period Ended March 31, 2000 Period Ended March 31, 1999/1/
--------------------------- -------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period
$1.00
-----
Income From Investment Operations
Net Investment Income 0.01711
Total From Investment Operations 0.01711
-------
Less Distributions
Dividends From Net Investment Income (0.01711)
Total Distributions (0.01711)
Net Asset Value, End of Period $1.00
=========
Total Return 1.72%/3/
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $305.72
Ratio of Net Operating Expenses to Average Net Assets 0.47%/2/
Ratio of Gross Operating Expenses to Average Net Assets/3/ 0.79%/2/
Ratio of Net Income to Average Net Assets 2.24%/2/
</TABLE>
<TABLE>
<CAPTION>
Notes:
<C> <S>
1. Inception date of the Fund was August 3, 1998.
2. Annualized.
3. Not Annualized.
</TABLE>
Page 49 of 52
<PAGE>
Excelsior Funds,
Inc.
Excelsior Tax-Exempt Funds, Inc.
Investment Adviser
United States Trust Company of New
York
114 W. 47th
Street
New York, New York 10036
U.S. Trust
Company
225 High Ridge
Road
East
Building
Stamford, Connecticut 06905
Distributor
Edgewood Services,
Inc.
5800 Corporate
Drive
Pittsburgh, Pennsylvania 15237-5829
More information about each Fund is available without charge through the
following:
Statement of Additional Information (SAI)
Page 50 of 52
<PAGE>
The SAIs dated August 1, 2000 include detailed information about Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. The SAIs are on file with the
SEC and are incorporated by reference into this prospectus. This means that the
SAIs, for legal purposes, are a part of this prospectus.
Annual and Semi-Annual
Reports
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, recent market conditions and trends.
To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 446-1012 (from overseas, call (617) 557-8280)
By Mail:
Excelsior Funds
73 Tremont Street
Boston, Massachusetts 02108-3913
By Internet: http://www.excelsiorfunds.com
Page 51 of 52
<PAGE>
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual
reports, as well as other information about Excelsior Funds, Inc. and Excelsior
Tax-Exempt Funds, Inc., from the EDGAR Database on the SEC's website
("http://www.sec.gov"). You may review and copy documents at the SEC Public
- --------------------
Reference Room in Washington, DC (for information on the operation of the Public
Reference Room, call 202-942-8090). You may request documents by mail from the
SEC, upon payment of a duplicating fee, by writing to: Securities and Exchange
Commission, Public Reference Section, Washington, DC 20549-0102. You may also
obtain this information, upon payment of a duplicating fee, by e-mailing the SEC
at the following address: [email protected]. The Investment Company Act
------------------
registration numbers of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
Inc. are 811-4088 and 811-4101, respectively.
Page 52 of 52
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
BLENDED EQUITY FUND
LARGE CAP GROWTH FUND
OPTIMUM GROWTH FUND
SMALL CAP FUND
VALUE AND RESTRUCTURING FUND
VALUE EQUITY FUND
ENERGY AND NATURAL RESOURCES FUND
REAL ESTATE FUND
TECHNOLOGY FUND
PROSPECTUS
AUGUST 1, 2000
INVESTMENT ADVISER
UNITED STATES TRUST COMPANY OF NEW YORK
U.S. TRUST COMPANY
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Page 1 of 71
<PAGE>
TABLE OF CONTENTS
Excelsior Funds, Inc. and Excelsior Institutional Trust are mutual fund families
that offer shares in separate investment portfolios which have individual
investment goals and strategies. This prospectus gives you important
information about the Blended Equity, Large Cap Growth, Small Cap, Value and
Restructuring, Energy and Natural Resources, Real Estate and Technology Funds of
Excelsior Funds, Inc. and the Optimum Growth and Value Equity Funds of Excelsior
Institutional Trust (each, a Fund) that you should know before investing. The
Optimum Growth and Value Equity Funds offer two classes of shares: shares, which
are offered in this prospectus, and Institutional Shares, which are offered in a
separate prospectus. Please read this prospectus and keep it for future
reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:
PAGE
BLENDED EQUITY FUND............................................. XX
LARGE CAP GROWTH FUND........................................... XX
OPTIMUM GROWTH FUND............................................. XX
SMALL CAP FUND.................................................. XX
VALUE AND RESTRUCTURING FUND.................................... XX
VALUE EQUITY FUND............................................... XX
ENERGY AND NATURAL RESOURCES FUND............................... XX
REAL ESTATE FUND................................................ XX
TECHNOLOGY FUND................................................. XX
MORE INFORMATION ABOUT RISK..................................... XX
MORE INFORMATION ABOUT FUND INVESTMENTS......................... XX
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS................... XX
PURCHASING, SELLING AND EXCHANGING FUND SHARES.................. XX
DISTRIBUTION OF FUND SHARES..................................... XX
DIVIDENDS AND DISTRIBUTIONS..................................... XX
TAXES........................................................... XX
FINANCIAL HIGHLIGHTS............................................ XX
HOW TO OBTAIN MORE INFORMATION ABOUT EXCELSIOR FUNDS............ Back Cover
Page 2 of 71
<PAGE>
Page 3 of 71
<PAGE>
INTRODUCTION - RISK/RETURN INFORMATION COMMON TO THE FUNDS
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal and strategies for reaching that goal.
The investment managers invest Fund assets in a way that they believe will help
a Fund achieve its goal. Still, investing in each Fund involves risk and there
is no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities a Fund owns and the markets in which they trade. The
effect on a Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.
THE ADVISER'S EQUITY INVESTMENT PHILOSOPHY:
The Adviser manages each of the Fund's investments with a view toward long-term
success. To achieve this success, the Adviser utilizes two fundamental
investment strategies, value and growth. The Adviser believes that, over the
long-term, the blending of these strategies will result in reduced volatility.
These strategies are combined with "longer-term investment themes" to assess the
investment potential of individual companies. Specific investment selection is
a "bottom-up" approach, guided by these strategies and themes to ensure proper
diversification, risk control and market focus.
VALUE: This long-term strategy consists of searching for, identifying and
obtaining the benefits of present or future investment values. For example,
such values may be found in a company's future earnings potential or in its
existing resources and assets. Accordingly, the Adviser is constantly engaged
in assessing, comparing and judging the worth of companies, particularly in
comparison to the price the markets place on such companies' shares.
GROWTH: This long-term strategy consists of buying and holding equity
securities of companies which it believes to be of high quality and high growth
potential. Typically, these companies are industry leaders with the potential
to dominate their markets by being low-cost, high-quality producers of products
or services. Usually these companies have an identifiable competitive
advantage. The Adviser believes that the earnings growth rate of these
companies is the primary determinant of their stock prices and that efficient
markets will reward consistently above average earnings growth with greater-
than-average capital appreciation over the long-term.
THEMES: To complete the Adviser's investment philosophy in managing the funds,
the investment strategies discussed above are applied in concert with long-term
investment themes to
Page 4 of 71
<PAGE>
identify investment opportunities. The Adviser believes these longer-term themes
represent strong and inexorable trends arising from economic, social,
demographic and cultural forces. The Adviser also believes that understanding
the instigation, catalysts and effects of these long-term trends will enable
them to identify companies that are currently or will soon benefit from these
trends.
Page 5 of 71
<PAGE>
BLENDED EQUITY FUND
FUND SUMMARY
INVESTMENT GOAL Long-term capital appreciation
Investment Focus Common stocks of U.S. companies
Share Price Volatility High
Principal Investment Strategy Invests in common stocks that the Adviser
believes are undervalued in the market
Investor Profile Investors seeking growth of capital, and who
are willing to accept the risks of investing
in equity securities
INVESTMENT OBJECTIVE
The Blended Equity Fund seeks long-term capital appreciation by investing in
companies that represent good long-term values not currently recognized in the
market prices of their securities.
INVESTMENT STRATEGY OF THE BLENDED EQUITY FUND
The Blended Equity Fund invests primarily (at least 65% of its assets) in large
capitalization (i.e., companies with market capitalizations over $5 billion)
common stocks of U.S. and, to a lesser extent, foreign companies that the
Adviser believes have value that is not currently reflected in their market
prices. The Adviser generally diversifies the Fund's investments over a variety
of industries and types of companies. The Fund may invest in companies of any
size, including small, high growth companies.
The Adviser takes a long-term approach to managing the Fund and tries to
identify companies with characteristics that will lead to future earnings growth
or recognition of their true value. The Adviser looks for companies that are
positioned to provide solutions to or benefit from complex social and economic
trends, or whose products are early in their life cycle and will experience
accelerating growth in the future. In addition, the Adviser invests a smaller
portion of the Fund's assets in a quantitatively selected segment of large
capitalization U.S. companies designed to complement the Fund's core holdings by
reducing portfolio volatility and further diversifying the Fund. In considering
whether to sell one or more portfolio holdings, the Adviser will generally seek
to minimize the tax impact of any such sale(s).
PRINCIPAL RISKS OF INVESTING IN THE BLENDED EQUITY FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may
Page 6 of 71
<PAGE>
suffer a decline in response. These factors contribute to price volatility,
which is the principal risk of investing in the Fund.
The Fund also may be subject to risks particular to its investments in foreign,
medium and smaller capitalization companies. These risks are discussed in
greater detail in the section entitled "More Information About Risk."
The Fund is also subject to the risk that undervalued common stocks may
underperform other segments of the equity market or the equity markets as a
whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
1990 (12.28)%
1991 34.98%
1992 16.56%
1993 16.34%
1994 0.22%
1995 28.93%
1996 19.88%
1997 29.73%
1998 28.70%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was XX.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Standard & Poor's 500 Composite Stock
Price Index.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------------------------
Blended Equity Fund XX.XX% XX.XX% XX.XX%
Standard & Poor's 500 Composite Stock Price Index XX.XX% XX.XX% XX.XX%
</TABLE>
WHAT IS AN INDEX?
Page 7 of 71
<PAGE>
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 8 of 71
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- -------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- -------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period of
one year from the date of this prospectus. For more information about these
fees, see "Investment Adviser" and "Distribution of Fund Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 9 of 71
<PAGE>
LARGE CAP GROWTH FUND
FUND SUMMARY
INVESTMENT GOAL Superior, risk-adjusted total return
Investment Focus Common stocks of large U.S. companies
Share Price Volatility High
Principal Investment Strategy Invests in common stocks of large companies that
the Adviser believes have above-average growth
prospects
Investor Profile Investors seeking total return, and who are
willing to accept the risks of investing in
equity securities of larger companies
INVESTMENT OBJECTIVE
The Large Cap Growth Fund seeks superior, risk-adjusted total return by
investing in larger companies whose growth prospects, in the opinion of the
Adviser, appear to exceed that of the overall market. This objective may be
changed without shareholder approval.
INVESTMENT STRATEGY OF THE LARGE CAP GROWTH FUND
The Large Cap Growth Fund invests primarily (at least 65% of its assets) in
common stocks of large U.S. companies with market capitalizations over $5
billion that the Adviser believes have above-average growth prospects.
The Adviser takes a long-term approach to managing the Fund and invests in
companies with characteristics that it believes will lead to future earnings
growth or recognition of their true value. In selecting particular investments,
the Adviser applies a bottom-up investment approach designed to identify the
best companies in the most rapidly growing industries. Frequently, these are
well established companies that are positioned to provide solutions to or
benefit from complex social and economic trends. However, the Fund also may
invest in smaller, high growth companies when the Adviser expects their earnings
to grow at an above-average rate.
PRINCIPAL RISKS OF INVESTING IN THE LARGE CAP GROWTH FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may
Page 10 of 71
<PAGE>
suffer a decline in response. These factors contribute to price volatility,
which is the principal risk of investing in the Fund.
The Fund also may be subject to risks particular to its investments in smaller
capitalization companies. These risks are discussed in greater detail in the
section entitled "More Information About Risk."
The Fund is also subject to the risk that large capitalization growth stocks may
underperform other segments of the equity market or the equity markets as a
whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
1998 67.04%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was XX.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Standard & Poor's 500 Composite Stock
Price Index.
1 YEAR SINCE INCEPTION
- ---------------------------------------------------------------------------
LARGE CAP GROWTH FUND XX.XX% XX.XX%*
POOR'S 500 COMPOSITE STOCK PRICE INDEX XX.XX% XX.XX%**
* Since October 1, 1997
** Since September 30, 1997
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
Page 11 of 71
<PAGE>
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Page 12 of 71
<PAGE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ------------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser" and "Distribution of Fund Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 13 of 71
<PAGE>
OPTIMUM GROWTH FUND
FUND SUMMARY
INVESTMENT GOAL Superior, risk-adjusted total return
Investment Focus Common stocks of U.S. companies
Share Price Volatility High
Principal Investment Strategy Invests in common stocks that the Adviser
believes have strong growth prospects
Investor Profile Investors seeking total return, and who are
willing to accept the risks of investing in
equity securities
INVESTMENT OBJECTIVE
The Optimum Growth Fund seeks superior, risk-adjusted total return. This
objective may be changed without shareholder approval.
INVESTMENT STRATEGY OF THE OPTIMUM GROWTH FUND
The Optimum Growth Fund invests primarily (at least 65% of its assets) in common
stocks of U.S. companies that the Adviser believes have growth prospects that
exceed those of the overall market. The Fund generally invests in mid- to
large-capitalization companies (i.e., companies with market capitalizations over
$1.5 billion) in a variety of industries.
The Adviser takes a long-term approach to managing the Fund and tries to
identify high quality companies with consistent or rising earnings growth
records. Typically, these companies are industry leaders with the potential to
dominate their markets by being the low cost, high quality producers of products
or services. In addition to its core portfolio selections, the Adviser further
diversifies Fund investments with a structured segment of issuers included in
the Russell 1000 Growth Index, which includes growth-oriented issuers selected
from among the 1000 largest U.S. issuers. From this universe, the Adviser
systematically selects companies that it believes, based on quantitative
screening, complements the Fund's core holdings by reducing portfolio volatility
and further diversifying the Fund.
PRINCIPAL RISKS OF INVESTING IN THE OPTIMUM GROWTH FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
Page 14 of 71
<PAGE>
The Fund is also subject to the risk that medium to large capitalization U.S.
stocks may underperform other segments of the equity market or the equity
markets as a whole.
The Fund also may be subject to risks particular to its investment in medium
capitalization companies. These risks are discussed in greater detail in the
section entitled "More Information About Risk."
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
1997 33.08%
1998 64.66%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was XX.XX%.
This table compares the average annual total returns of the Fund's shares for
the periods ended December 31, 1999 to those of the Russell 1000 Growth Index.
1 YEAR SINCE INCEPTION
- -----------------------------------------------------------------
Optimum Growth Fund (Shares) XX.XX% XX.XX%*
RUSSELL 1000 GROWTH INDEX XX.XX% XX.XX%**
* Since July 3, 1996
** Since June 30, 1996
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
Page 15 of 71
<PAGE>
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Page 16 of 71
<PAGE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ---------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ---------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser" and "Distribution of Fund Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 17 of 71
<PAGE>
SMALL CAP FUND
FUND SUMMARY
INVESTMENT GOAL Capital appreciation
Investment Focus Equity securities of small cap U.S. issuers
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of smaller
companies that are expected to achieve
substantial long-term earnings growth
Investor Profile Investors seeking capital appreciation, and who
are willing to tolerate the risks of investing
in smaller companies
INVESTMENT OBJECTIVE
The Small Cap Fund seeks long-term capital appreciation by investing primarily
in companies with capitalization of $1.5 billion or less.
INVESTMENT STRATEGY OF THE SMALL CAP FUND
The Small Cap Fund invests primarily (at least 65% of its assets) in equity
securities of smaller U.S.-based companies that are in the early stages of
development and which the Adviser believes have the potential to achieve
substantial long-term earnings growth.
In selecting investments for the Fund, the Adviser applies a bottom-up
investment approach designed to identify innovative companies whose potential is
not yet reflected in their market values. Generally, the Fund invests in
companies with market capitalizations of $1.5 billion or less, but the Adviser
also considers, to a lesser degree, larger or more mature companies engaged in
new or higher growth operations that the Adviser believes will result in
accelerated earnings growth.
PRINCIPAL RISKS OF INVESTING IN THE SMALL CAP FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
The smaller capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these small companies may have limited product lines, markets and
financial resources, and may depend upon a relatively small management group.
Therefore, small cap stocks may be more volatile
Page 18 of 71
<PAGE>
than those of larger companies. These securities may be traded over the counter
or listed on an exchange.
The Fund is also subject to the risk that small capitalization growth stocks may
underperform other segments of the equity market or the equity markets as a
whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
1993 27.91%
1994 5.30%
1995 22.81%
1996 (2.30)%
1997 14.21%
1998 (12.38)%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 2000 Index.
1 YEAR 5 YEARS SINCE INCEPTION
- ----------------------------------------------------------------------------
SMALL CAP FUND XX.XX% XX.XX% XX.XX%*
RUSSELL 2000 INDEX XX.XX% XX.XX% XX.XX%*
* Since December 31, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
Page 19 of 71
<PAGE>
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Page 20 of 71
<PAGE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- -----------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- -----------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period
of one year from the date of this prospectus. For more information about
these fees, see "Investment Adviser" and "Distribution of Fund Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 21 of 71
<PAGE>
VALUE AND RESTRUCTURING FUND
FUND SUMMARY
INVESTMENT GOAL Long-term capital appreciation
Investment Focus Common stock of U.S. companies
Share Price Volatility High
Principal Investment Strategy Investing in common stocks of companies which
the Adviser believes are undervalued by the
market and whose share price are expected to
benefit from the value created through
restructuring or industry consolidation
Investor Profile Investors seeking long-term capital
appreciation, and who are willing to bear the
risks of investing in equity securities
INVESTMENT OBJECTIVE
The Value and Restructuring Fund seeks long-term capital appreciation by
investing in companies which will benefit from their restructuring or
redeployment of assets and operations in order to become more competitive or
profitable.
INVESTMENT STRATEGY OF THE VALUE AND RESTRUCTURING FUND
The Value and Restructuring Fund invests primarily (at least 65% of its assets)
in common stocks of U.S. and, to a lesser extent, foreign companies whose share
price, in the opinion of the Adviser, does not reflect the economic value of the
company's assets, but where the Adviser believes restructuring efforts or
industry consolidation will serve to highlight the true value of the company.
In choosing investments for the Fund, the Adviser looks for companies where
restructuring activities, such as consolidations, outsourcing, spin-offs or
reorganizations, will offer significant value to the issuer and increase its
investment potential. The Adviser may select companies of any size for the Fund
and the Fund invests in a diversified group of companies across a number of
different industries.
PRINCIPAL RISKS OF INVESTING IN THE VALUE AND RESTRUCTURING FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may
Page 22 of 71
<PAGE>
suffer a decline in response. These factors contribute to price volatility,
which is the principal risk of investing in the Fund.
The smaller capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these small companies may have limited product lines, markets and
financial resources, and may depend upon a relatively small management group.
Therefore, small cap stocks may be more volatile than those of larger companies.
These securities may be traded over the counter or listed on an exchange.
The Fund also may be subject to risks particular to its investments in foreign
and medium capitalization companies. These risks are discussed in greater
detail in the section entitled "More Information About Risk."
The Fund is also subject to the risk that equity securities of issuers expected
to experience a restructuring or business combination may underperform other
segments of the equity market or the equity markets as a whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
1993 39.95%
1994 2.60%
1995 38.80%
1996 25.05%
1997 33.56%
1998 10.32%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was XX.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 1000 Value Index.
1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------
Value and Restructuring Fund XX.XX% XX.XX% XX.XX%*
Russell 1000 Value Index XX.XX% XX.XX% XX.XX%*
Page 23 of 71
<PAGE>
* Since December 31, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ------------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses
in order to keep total operating expenses from exceeding [X.XX%], for a
period of one year from the date of this prospectus. For more information
about these fees, see "Investment Adviser" and "Distribution of Fund
Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although
Page 24 of 71
<PAGE>
your actual costs and returns might be different, your approximate costs of
investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 25 of 71
<PAGE>
VALUE EQUITY FUND
FUND SUMMARY
INVESTMENT GOAL Long-term capital appreciation
Investment Focus Common stocks of U.S. companies
Share Price Volatility High
Principal Investment Strategy Investing in common stocks that the Adviser
believes are undervalued by the market
Investor Profile Investors seeking growth of capital, and who
are willing to accept the risks of investing
in equity securities
INVESTMENT OBJECTIVE
The Value Equity Fund seeks long-term capital appreciation. This objective may
be changed without shareholder approval.
INVESTMENT STRATEGY OF THE VALUE EQUITY FUND
The Value Equity Fund invests primarily (at least 65% of its assets) in common
stocks of U.S. and, to a lesser extent, foreign companies that the Adviser
believes are undervalued at current market prices. The Adviser generally
diversifies the Fund's investments over a variety of industries and the Fund may
invest in companies of any size, including small, high growth companies.
In selecting investments for the Fund, the Adviser combines fundamental research
with valuation constraints to identify companies trading at what the Adviser
believes are reasonable prices and displaying characteristics expected to lead
to greater recognition of true value. The Adviser believes that events such as
restructuring activities and industry consolidations can be the catalysts
necessary to realize this value.
PRINCIPAL RISKS OF INVESTING IN THE VALUE EQUITY FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
The smaller capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these small companies may have limited product lines, markets and
financial resources, and may depend
Page 26 of 71
<PAGE>
upon a relatively small management group. Therefore, small cap stocks may be
more volatile than those of larger companies. These securities may be traded
over the counter or listed on an exchange.
The Fund also may be subject to risks particular to its investments in foreign
and medium capitalization companies. These risks are discussed in greater
detail in the section entitled "More Information About Risk."
The Fund is also subject to the risk that its undervalued equity securities may
underperform other segments of the equity market or the equity markets as a
whole.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year.
1998 20.11%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was XX.XX%.
This table compares the average annual total returns of the Fund's shares for
the periods ended December 31, 1999 to those of the Russell 1000 Value Index.
1 YEAR SINCE INCEPTION
- ----------------------------------------------------------------------
Value Equity Fund (Shares) XX.XX% XX.XX%*
Russell 1000 Value Index XX.XX% XX.XX%**
* Since January 15, 1997
** Since December 31, 1996
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 27 of 71
<PAGE>
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ---------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ---------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses
in order to keep total operating expenses from exceeding [X.XX%], for a
period of one year from the date of this prospectus. For more information
about these fees, see "Investment Adviser" and "Distribution of Fund
Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 28 of 71
<PAGE>
ENERGY AND NATURAL RESOURCES FUND
FUND SUMMARY
INVESTMENT GOAL Long-term capital appreciation
Investment Focus Equity securities of U.S. and foreign energy
and natural resources companies
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of U.S. and
foreign issuers engaged in the energy and
natural resources groups of industries
Investor Profile Investors seeking long-term growth of
capital, and who are willing to accept the
risks of investing in a non-diversified
portfolio of energy and natural resources
companies
INVESTMENT OBJECTIVE
The Energy and Natural Resources Fund seeks long-term capital appreciation by
investing primarily in companies that are in the energy and other natural
resources groups of industries. The Fund may also invest, to a more limited
extent, in gold and other precious metal bullion and coins.
INVESTMENT STRATEGY OF THE ENERGY AND NATURAL RESOURCES FUND
The Energy and Natural Resources Fund invests primarily (at least 65% of its
assets) in equity securities of U.S. and, to a lesser extent, foreign companies
engaged in the energy and natural resources industries. These companies include
those engaged in the discovery, development, production or distribution of
energy or other natural resources and companies that develop technologies and
furnish energy and natural resource supplies and services to these companies.
In selecting investments for the Fund, the Adviser takes a long-term approach
and seeks to identify companies whose value is not recognized in the prices of
their securities or with characteristics that will lead to above-average
earnings growth.
Energy companies normally will constitute a significant portion of the Fund's
investments, and the Fund typically invests at least 50% of its assets in crude
oil, petroleum and natural gas companies. The Fund also may invest a portion of
its assets in precious metals, such as gold bullion, and companies engaged in
the production of precious metals. The Fund invests in companies of any size,
including small, high growth companies.
PRINCIPAL RISKS OF INVESTING IN THE ENERGY AND NATURAL RESOURCES FUND
The Fund is subject to the risk that the securities of issuers engaged in the
energy and natural resources industries that the Fund purchases will
underperform other market sectors or the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business in the
same industry, the Fund is subject to legislative or regulatory changes, adverse
Page 29 of 71
<PAGE>
market conditions and/or increased competition affecting that industry. The
values of natural resources are affected by numerous factors including events
occurring in nature and international politics. For instance, events in nature
(such as earthquakes or fires in prime natural resources areas) and political
events (such as coups or military confrontations) can affect the overall supply
of a natural resource and thereby the value of companies involved in such
natural resource.
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
The Fund also may be subject to risks particular to its investments in foreign,
medium and smaller capitalization companies. These risks are discussed in
greater detail in the section entitled "More Information About Risk."
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or more
of these issuers, and may experience increased volatility due to its investments
in those securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
1993 14.69%
1994 (2.70)%
1995 20.11%
1996 38.38%
1997 18.31%
1998 (15.87)%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was XX.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Standard & Poor's 500 Composite Stock
Price Index.
Page 30 of 71
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 YEAR 5 YEARS SINCE INCEPTION
- ----------------------------------------------------------------------------------------------------------------
Energy and Natural Resources Fund XX.XX% XX.XX% XX.XX%*
Standard & Poor's 500 Composite Stock Price Index XX.XX% XX.XX% XX.XX%*
</TABLE>
* Since December 31, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ------------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses
in order to keep total operating expenses from exceeding [X.XX%], for a
period of one year from the date of this prospectus. For more information
about these fees, see "Investment Adviser" and "Distribution of Fund
Shares."
Page 31 of 71
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 32 of 71
<PAGE>
REAL ESTATE FUND
FUND SUMMARY
INVESTMENT GOAL Current income and long-term capital
appreciation
Investment Focus Equity securities of companies engaged in the
real estate business
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of real estate
investment trusts (REITs) and other issuers
engaged in the real estate industry
Investor Profile Investors seeking current income and long-term
growth of capital, and who are willing to
accept the risks of investing in a non-
diversified portfolio of real estate issuers
INVESTMENT OBJECTIVE
The Real Estate Fund seeks current income and long-term capital appreciation by
investing in real estate investment trusts and other companies principally
engaged in the real estate business. This objective may be changed without
shareholder approval.
INVESTMENT STRATEGY OF THE REAL ESTATE FUND
The Real Estate Fund invests primarily (at least 65% of its assets) in REITs and
other publicly-traded equity securities of U.S. and, to a lesser extent, foreign
companies engaged in the real estate industry. REITs pool investors' funds for
investment directly in real estate (equity REITs), real estate loans (mortgage
REITs), or a combination of the two (hybrid REITs). The Fund intends to invest
primarily in equity and hybrid REITs. REITs generally are income producing
investments. The Fund also invests in other issuers engaged in the real estate
business, such as developers, mortgage lenders and servicers, construction
companies and building material suppliers.
The Adviser takes a long-term approach to managing the Fund and seeks to
identify companies with characteristics that will lead to above-average earnings
growth. The Adviser analyzes demographic and macroeconomic factors to determine
regional allocations. Based on its regional allocations, the Adviser selects
particular investments based on its analysis of valuation relative to underlying
real estate values.
PRINCIPAL RISKS OF INVESTING IN THE REAL ESTATE FUND
The Fund is subject to the risk that the securities of issuers in the real
estate industry that the Fund purchases will underperform other market sectors
or the market as a whole. To the extent that the Fund's investments are
concentrated in issuers conducting business in the same industry, the Fund is
subject to legislative or regulatory changes, adverse market conditions and/or
increased competition affecting that industry.
Page 33 of 71
<PAGE>
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
The Fund's investments in the securities of REITs and companies principally
engaged in the real estate industry may subject the Fund to the risks associated
with the direct ownership of real estate. Risks commonly associated with the
direct ownership of real estate include fluctuations in the value of underlying
properties and defaults by borrowers or tenants. In addition to these risks,
REITs are dependent on specialized management skills and some REITs may have
investments in relatively few properties, or in a small geographic area or a
single type of property. These factors may increase the volatility of the
Fund's investments in REITs.
The Fund also may be subject to risks particular to its investments in foreign
companies. These risks are discussed in greater detail in the section entitled
"More Information About Risk."
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or more
of these issuers, and may experience increased volatility due to its investments
in those securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
1998 (13.55)%
1999 XX.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Morgan Stanley REIT Index.
1 YEAR SINCE INCEPTION
- -----------------------------------------------------------------------------
Real Estate Fund XX.XX% XX.XX%*
Morgan Stanley REIT Index XX.XX% XX.XX%**
Page 34 of 71
<PAGE>
* Since October 1, 1997
** Since September 30, 1997
Page 35 of 71
<PAGE>
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- ---------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- ---------------------------------------------------------------------------
NET ANNUAL FUND OPERATING EXPENSES X.XX%
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding [X.XX%], for a period of
one year from the date of this prospectus. For more information about these
fees, see "Investment Adviser" and "Distribution of Fund Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
Page 36 of 71
<PAGE>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$XXX $XXX $XXX $XXX
Page 37 of 71
<PAGE>
TECHNOLOGY FUND
FUND SUMMARY
<TABLE>
<S> <C>
INVESTMENT GOAL Superior, long-term growth of capital
INVESTMENT FOCUS Common stocks of technology companies
SHARE PRICE VOLATILITY High
PRINCIPAL INVESTMENT STRATEGY Invests in common stocks of companies expected to benefit
from the development, advancement and use of technology
INVESTOR PROFILE Investors seeking long-term growth of capital, and who
are willing to accept the risks of investing in a
non-diversified portfolio of technology companies
</TABLE>
INVESTMENT OBJECTIVE
The Technology Fund seeks superior, long-term growth of capital. This objective
may be changed without shareholder approval. The Fund seeks to achieve its
objective by investing in companies expected to benefit from the development,
advancement and use of technology and whose long-term growth prospects, in the
Adviser's opinion, appear to exceed the overall market. These companies may be
in a variety of industries, and may include computer hardware, software,
electronic components and systems, telecommunications, internet, biotechnology,
media and information services companies or other companies that use technology
extensively in the development of new or improved products or processes.
INVESTMENT STRATEGY OF THE TECHNOLOGY FUND
Under normal market conditions, the Technology Fund invests at least 65% of its
assets in the equity securities of U.S. and, to a lesser extent, foreign
technology companies. The Fund may invest in companies of any size, including
small, high growth companies.
In selecting investments for the Fund, the Adviser takes a long-term approach
and seeks to identify technology companies whose value is not recognized in the
prices of their securities or with characteristics that will lead to above-
average earnings growth.
The Fund seeks capital appreciation as its principal investment strategy.
PRINCIPAL RISKS OF INVESTING IN THE TECHNOLOGY FUND
The Fund is subject to the risk that the securities of issuers engaged in the
technology sector of the economy that the Fund purchases will underperform other
market sectors or the market as a whole. To the extent that the Fund's
investments are concentrated in issuers conducting business in the same
technology market sector, the Fund is subject to legislative or regulatory
changes, adverse market conditions and/or increased competition affecting that
market sector. Competitive pressures may significantly impact the financial
condition of technology companies. For
Page 38 of 71
<PAGE>
example, an increasing number of companies and new product offerings can lead to
price cuts and slower selling cycles, and many of these companies may be
dependent on the success of a principal product, may rely on sole source
providers and third-party manufacturers, and may experience difficulties in
managing growth. In addition, securities of technology companies may experience
dramatic price movements that have little or no basis in fundamental economic
conditions. As a result, the Fund's investment in technology companies may
subject it to more volatile price movements than a more diversified securities
portfolio.
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate substantially from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
The Fund also may be subject to risks particular to its investments in foreign,
medium and smaller capitalization companies. These stocks may be more volatile
than other equity securities, and the risks associated with them are discussed
in greater detail in the section entitled "More Information About Risk."
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or more
of these issuers, and may experience increased volatility due to its investments
in those securities.
PERFORMANCE INFORMATION
There is no performance information for the Technology Fund because the Fund
does not have a full calendar year of operations.
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<PAGE>
FUND FEES AND EXPENSES
Every mutual fund has operating expenses to pay for services such as
professional advisory, shareholder, administration and custody services and
other costs of doing business. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.25%
Other Operating Expenses 0.25%
Total Other Expenses 0.50%
- -----------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.50%
Fee Waivers and Expense Reimbursements 0.25%
NET ANNUAL FUND OPERATING EXPENSES 1.25%*
* The Fund's total annual fund operating expenses and net annual fund operating
expenses are estimated based on expenses expected to be incurred in the
current fiscal year. The Adviser has contractually agreed to waive its
investment advisory fee or other fees during the current fiscal year, in an
amount equal to the administrative servicing fee paid by the Fund.
Accordingly, Net Fund Annual Operating Expenses are expected to be 1.25%. For
more information about these fees, see "Investment Adviser."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 YEAR 3 YEARS
$127 $397
Page 40 of 71
<PAGE>
MORE INFORMATION ABOUT RISK
EQUITY RISK - Equity securities include public All Funds
and privately issued equity securities, common
and preferred stocks, warrants, rights to
subscribe to common stock and convertible
securities, as well as instruments that attempt
to track the price movement of equity indices.
Investments in these securities in general are
subject to market risks that may cause their
prices to fluctuate over time. The value of
securities convertible into equity securities,
such as warrants or convertible debt, is also
affected by prevailing interest rates, the
credit quality of the issuer and any call
provision.
SMALL CAP RISK - The smaller capitalization Blended Equity Fund
companies in which the Funds may invest may be Large Cap Growth Fund
more vulnerable to adverse business or economic Small Cap Fund
events than larger, more established companies. Value and Restructuring Fund
In particular, these small companies may have Value Equity Fund
limited product lines, markets and financial Energy and Natural Resources
resources, and may depend upon a relatively Fund Technology Fund
small management group. Therefore, small cap
stocks may be more volatile than those of larger
companies.
Page 41 of 71
<PAGE>
<TABLE>
<S> <C>
MID CAP RISK - The medium capitalization Blended Equity Fund
companies that the Funds may invest in may be Optimum Growth Fund
more vulnerable to adverse business or economic Value and Restructuring Fund
events than larger companies. In particular, Value Equity Fund
these companies may have limited product lines, Energy and Natural Resources Fund
markets and financial resources, and may depend Technology Fund
on a relatively small management group.
Therefore, medium capitalization stocks may be
more volatile than those of larger companies.
MORTGAGE-BACKED SECURITIES - Mortgage-backed Real Estate Fund
securities are fixed income securities
representing an interest in a pool of underlying
mortgage loans. They are sensitive to changes
in interest rates, but may respond to these
changes differently from other fixed income
securities due to the possibility of prepayment
of the underlying mortgage loans. As a result,
it may not be possible to determine in advance
the actual maturity date or average life of a
mortgage-backed security. Rising interest rates
tend to discourage refinancings, with the result
that the average life and volatility of the
security will increase, exacerbating its
decrease in market price. When interest rates
fall, however, mortgage-backed securities may
not gain as much in market value because of the
expectation of additional mortgage prepayments
that must be reinvested at lower interest rates.
Prepayment risk may make it difficult to
calculate the average maturity of a portfolio of
mortgage-backed securities and, therefore, to
assess the volatility risk of that portfolio.
</TABLE>
Page 42 of 71
<PAGE>
TECHNOLOGY RISK - The Funds may invest in Blended Equity Fund
securities of issuers engaged in the technology Large Cap Growth Fund
sector of the economy. These securities may Optimum Growth Fund
underperform stocks of other issuers or the Small Cap Fund
market as a whole. To the extent that the Funds Value and Restructuring Fund
invest in issuers conducting business in the Value Equity Fund
technology market sector, the Funds are subject Technology Fund
to legislative or regulatory changes, adverse
market conditions and/or increased competition
affecting the market sector. Competitive
pressures may significantly impact the financial
condition of technology companies. For example,
an increasing number of companies and new
product offerings can lead to price cuts and
slower selling cycles, and many of these
companies may be dependent on the success of a
principal product, may rely on sole source
providers and third-party manufacturers, and may
experience difficulties in managing growth. In
addition, securities of technology companies may
experience dramatic price movements that have
little or no basis in fundamental economic
conditions. As a result, a Fund's investment in
technology companies may subject it to more
volatile price movements.
FOREIGN SECURITY RISKS - Investments in All Funds
securities of foreign companies or governments
can be more volatile than investments in U.S.
companies or governments. Diplomatic,
political, or economic developments, including
nationalization or appropriation, could affect
investments in foreign countries. Foreign
securities markets generally have less trading
volume and less liquidity than U.S. markets. In
addition, the value of securities denominated in
foreign currencies, and of dividends from such
securities, can change significantly when
foreign currencies strengthen or weaken relative
to the U.S. dollar. Foreign companies or
governments generally are not subject to uniform
accounting, auditing, and financial reporting
standards comparable to those applicable to
domestic U.S. companies or governments.
Transaction costs are generally higher than
those in the U.S. and expenses for custodial
arrangements of foreign securities may be
somewhat greater than typical expenses for
custodial arrangements of similar U.S.
securities. Some foreign governments levy
withholding taxes against dividend and interest
income. Although in some countries a portion of
these taxes is
Page 43 of 71
<PAGE>
recoverable, the non-recovered portion will
reduce the income received from the
securities comprising the portfolio.
CURRENCY RISK - Investments in foreign securities All Funds
denominated in foreign currencies involve
additional risks, including:
. A Fund may incur substantial costs in
connection with conversions between various
currencies.
. Only a limited market currently exists for
hedging transactions relating to currencies in
certain emerging markets.
Page 44 of 71
<PAGE>
MORE INFORMATION ABOUT FUND INVESTMENTS
In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During adverse economic, market or other
conditions, each Fund may take temporary defensive positions such as investing
up to 100% of its assets in investments that would not ordinarily be consistent
with a Fund's objective. The Fund may not achieve its objective when so
invested. A Fund will do so only if the Adviser believes that the risk of loss
outweighs the opportunity for capital gains or higher income. Of course, a Fund
cannot guarantee that it will achieve its investment goal.
INVESTMENT ADVISER
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.
On January 13, 2000, The Charles Schwab Corporation ("Schwab") and U.S. Trust
Corporation announced that they had signed an agreement to merge (the "Merger").
The Merger is subject to the approval of U.S. Trust Corporation shareholders and
is expected to close in the second quarter of 2000. Under the terms of the
agreement, U.S. Trust Corporation will retain its name and continue to provide
investment management, fiduciary, financial planning and private banking
services. As a result, U.S. Trust will continue to serve as the investment
adviser to the Funds. The Merger, however, will represent a change of ownership
of the Adviser's parent corporation and, as such, will have the effect under the
Investment Company Act of 1940 of terminating the existing advisory agreements
between Excelsior Funds, Inc. and the Adviser and between Excelsior
Institutional Trust and the Adviser.
As a consequence of the Merger and in order to facilitate the investment
management of the Funds, the Board of Directors of Excelsior Funds, Inc. and the
Board of Trustees of Excelsior Institutional Trust approved new advisory
agreements with the Adviser on March 3, 2000. The new advisory agreements were
subsequently approved by a vote of shareholders of each of the Funds at meetings
held on May 3, 2000. The new advisory agreements will become effective on the
date of the Merger.
U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. On December 31, 1999,
U.S. Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W. 47th
Street, New York, NY
Page 45 of 71
<PAGE>
10036. U.S. Trust Company has its principal offices at 225 High Ridge Road, East
Building, Stamford, CT 06905.
The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.
The Board of Directors of Excelsior Funds, Inc. and the Board of Trustees of
Excelsior Institutional Trust supervise the Adviser and establish policies that
the Adviser must follow in its management activities.
For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:
Blended Equity Fund [0.69%]
Large Cap Growth Fund [0.71%]
Optimum Growth Fund [0.43%]
Small Cap Fund [0.49%]
Value and Restructuring Fund [0.48%]
Value Equity Fund [0.39%]
Energy and Natural Resources Fund [0.50%]
Real Estate Fund [0.77%]
Technology Fund [0.XX%]*
* The Technology Fund commenced operations on March 31, 2000. The fees given are
the contractual rate of advisory fees.
PORTFOLIO MANAGERS
Leigh H. Weiss and Bruce Tavel have served as the Blended Equity Fund's
portfolio co-managers since 1997. Mr. Weiss, a Managing Director and Senior
Portfolio Manager, has been with U.S. Trust since 1993. Prior to joining U.S.
Trust, Mr. Weiss was a portfolio manager with Goldman, Sachs & Co. Mr. Tavel, a
Managing Director and head of U.S. Trust's Structured Investments Division, has
been with U.S. Trust since 1980. Mr. Weiss and Mr. Tavel are primarily
responsible for the day to day management of the Blended Equity Fund's
portfolio. Research, analyses, trade execution and other facilities provided by
U.S. Trust and other personnel also play a significant role in portfolio
management and performance.
David J. Williams has served as the Value and Restructuring Fund and Value
Equity Fund portfolio manager since their inceptions. Mr. Williams, a Managing
Director and Senior Portfolio Manager of the Personal Investment Division of
U.S. Trust, has been with U.S. Trust since 1987. Mr. Williams is primarily
responsible for the day to day management of the Value and Restructuring and the
Value Equity Funds' portfolios. Research, analyses, trade execution and other
facilities provided by U.S. Trust and other personnel also play a significant
role in portfolio management and performance.
Page 46 of 71
<PAGE>
Timothy Pettee and Margaret Doyle have served as the Small Cap Fund's portfolio
co-managers since 1998. Mr. Pettee, a Managing Director and Director of Equity
Research, has been with U.S. Trust since 1998. Prior to joining U.S. Trust, Mr.
Pettee was a Vice President and fund manager with Alliance Capital Management in
New York. Ms. Doyle, a Vice President in U.S. Trust's equity research division,
has been with U.S. Trust since 1998. From 1996 to 1998, Ms. Doyle was a Vice
President and Investment Officer with J&W Seligman & Co. in New York. From 1994
to 1996, Ms. Doyle was an Equity Research Analyst with Solomon Brothers, Inc. in
New York. Mr. Pettee and Ms. Doyle are primarily responsible for the day to day
management of the Small Cap Fund's portfolio. Research, analyses, trade
execution and other facilities provided by U.S. Trust and other personnel also
play a significant role in portfolio management and performance.
All investment decisions for the Large Cap Growth Fund, Optimum Growth Fund, and
the Technology Fund are made by a committee of investment professionals and no
persons are primarily responsible for making recommendations to that committee.
United States Trust Company of New York provides its investment advisory
services to the Large Cap Growth Fund, Optimum Growth Fund, and the Technology
Fund primarily through its Campbell Cowperthwait division.
Michael E. Hoover has served as the Energy and Natural Resources Fund's
portfolio manager since 1995. Mr. Hoover, Senior Vice President and Senior
Analyst, has been with U.S. Trust since 1989. Mr. Hoover is primarily
responsible for the day to day management of the Energy and Natural Resources
Fund's portfolio. Research, analyses, trade execution and other facilities
provided by U.S. Trust and other personnel also play a significant role in
portfolio management and performance.
Joan Ellis has served as the Real Estate Fund's portfolio manager or co-manager
since its inception. Ms. Ellis, Senior Vice President in the Investment
Research Division, has been with U.S. Trust since 1984. Ms. Ellis is primarily
responsible for the day to day management of the Real Estate Fund's portfolio.
Research, analyses, trade execution and other facilities provided by U.S. Trust
and other personnel also play a significant role in portfolio management and
performance.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange shares of the Funds.
HOW TO PURCHASE FUND SHARES
You may purchase shares directly by:
. Mail
. Telephone
. Wire, or
. Automatic Investment Program
To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay
Page 47 of 71
<PAGE>
by wire or through the automatic investment program, write your check, payable
in U.S. dollars, to "Excelsior Funds" and include the name of the appropriate
Fund(s) on the check. A Fund cannot accept third-party checks, credit cards,
credit card checks or cash. To purchase shares by wire, please call us for
instructions. Federal funds and registration instructions should be wired
through the Federal Reserve System to:
The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account Number 9102732915
For Further Credit To:
Excelsior Funds
[Wire Control Number]
[Excelsior Funds Account Registration (including account number)]
Investors making initial investments by wire must promptly complete the enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your broker or institution may charge a fee for its services, in addition to the
fees charged by the Fund. You will also generally have to address your
correspondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). A Fund may reject any
purchase request if it is determined that accepting the request would not be in
the best interests of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good order.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received.
Each Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So,
for you to receive the current Business Day's NAV, a Fund must receive your
purchase request in good order before 4:00 p.m., Eastern time.
Page 48 of 71
<PAGE>
HOW WE CALCULATE NAV
NAV for one Fund share is the value of that share's portion of the net assets of
the Fund.
In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser thinks that they are
unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Directors and the Board of Trustees, as the case may
be. Fixed income investments with remaining maturities of 60 days or less
generally are valued at their amortized cost which approximates their market
value.
Some Funds may hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the market value of a Fund's investments may change on days
when you cannot purchase or sell Fund shares.
MINIMUM PURCHASES
To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in any Fund.
Your subsequent investments must be made in amounts of at least $50.
A Fund may accept investments of smaller amounts at its discretion.
AUTOMATIC INVESTMENT PROGRAM
If you have a checking, money market or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.
With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.
HOW TO SELL YOUR FUND SHARES
You may sell shares directly by:
. Mail
. Telephone, or
. Systematic Withdrawal Plan
Holders of Fund shares may sell (sometimes called "redeem") shares by following
the procedures established when they opened their account or accounts. If you
have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).
You may sell your shares by sending a written request for redemption to:
Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.
Page 49 of 71
<PAGE>
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012 (from
overseas, call (617) 557-8280). The minimum amount for telephone redemptions is
$500. We may reject a telephone redemption request if we deem it advisable to
do so.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or
institution may charge a fee for its services, in addition to the fees charged
by the Fund.
If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.
SYSTEMATIC WITHDRAWAL PLAN
If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.
Page 50 of 71
<PAGE>
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds within five Business Days after we
receive your request in good order. Your proceeds can be wired to your bank
account (if more than $500) or sent to you by check. IF YOU RECENTLY PURCHASED
YOUR SHARES BY CHECK, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK
HAS CLEARED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes on
any capital gains from the sale as with any redemption.
INVOLUNTARY SALES OF YOUR SHARES
If your account balance drops below $500 because of redemptions, you may be
required to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.
HOW TO EXCHANGE YOUR SHARES
You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for shares of any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or
by telephone if you previously selected the telephone exchange option on the
account application.
You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.
IF YOU RECENTLY PURCHASED SHARES BY CHECK YOU MAY NOT BE ABLE TO EXCHANGE YOUR
SHARES UNTIL YOUR CHECK HAS CLEARED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE
OF PURCHASE). This exchange privilege may be changed or canceled at any time
upon 60 days' notice.
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<PAGE>
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.
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<PAGE>
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards
and procedures to confirm the identity of callers and the authenticity of
instructions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.
AUTHORIZED INTERMEDIARIES
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund shares.
These intermediaries may authorize other organizations to accept purchase,
redemption and exchange requests for Fund shares. These requests are normally
executed at the NAV next determined after the intermediary receives the request
in good order. Authorized intermediaries are responsible for transmitting
requests and delivering funds on a timely basis.
SHAREHOLDER SERVICING
The Funds are permitted to pay a shareholder servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.40% (0.25% in the case
of the Technology Fund) of the average daily net asset value of Fund shares held
by clients of a shareholder organization.
DISTRIBUTION OF FUND SHARES
The Optimum Growth and Value Equity Funds have adopted a distribution plan that
allows shares of the Funds to pay distribution fees for the sale and
distribution of their shares in an amount not to exceed the annual rate of 0.25%
of the average daily net asset value of each Fund's outstanding shares. Because
these fees are paid out of a Fund's assets continuously, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares.
Page 53 of 71
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes dividends from its income quarterly.
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends
and distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.
Page 54 of 71
<PAGE>
TAXES
Each Fund will distribute substantially all of its taxable income including its
net capital gain (the excess of long-term capital over short-term capital loss),
if any. Distributions you receive from a Fund will generally be taxable
regardless of whether they are paid in cash or reinvested in additional shares.
Distributions attributable to the net capital gain of a Fund will be taxable to
you as long-term capital gain, regardless of how long you have held your shares.
Other Fund distributions will generally be taxable as ordinary income.
You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other tax-
qualified plan) will generally not be currently taxable.
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or localities
within the state.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, may
be subject to different United States federal income tax treatment. You should
consult your tax adviser for further information regarding federal, state, local
and/or foreign tax consequences relevant to your specific situation.
Page 55 of 71
<PAGE>
MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.
Page 56 of 71
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand: each Fund's
financial performance for the past five years, or, if shorter, the period of the
Fund's operations. Some of this information reflects financial information for
a single Fund share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in a Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
_________________, independent public accountants. Their report, along with
each Fund's financial statements, are incorporated by reference into our
Statement of Additional Information. You can obtain the annual report, which
contains more performance information, at no charge by calling (800) 446-1012
(from overseas, call (617) 557-8280).
Page 57 of 71
<PAGE>
BLENDED EQUITY FUND
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ------- ------- ------- -------
Net Asset Value, Beginning of Year $ 36.12 $ 25.81 $ 24.43 $ 21.40
------- ------- ------- -------
Income From Investment Operations
Net Investment Income 0.11 0.16 0.18 0.12
Net Gains on Securities (both realized and unrealized) 6.90 12.59 2.50 5.21
------- ------- ------- -------
Total From Investment Operations 7.01 12.75 2.68 5.33
------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.13) (0.16) (0.14) (0.11)
Distributions From Net Realized Gain on Investments and Options (0.49) (2.28) (1.16) (2.19)
Total Distributions (0.62) (2.44) (1.30) (2.30)
------- ------- ------- -------
Net Asset Value, End of Year $ 42.51 $ 36.12 $ 25.81 $ 24.43
======= ======= ======= =======
Total Return 19.65% 50.82% 11.09% 26.45%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $720.27 $594.91 $306.99 $188.57
Ratio of Net Operating Expenses to Average Net Assets 0.95% 0.99% 1.01% 1.05%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.01% 1.06% 1.06% 1.12%
Ratio of Net Investment Income to Average Net Assets 0.29% 0.55% 0.71% 0.55%
Portfolio Turnover Rate 20.0% 28.0% 39.0% 27.0%
</TABLE>
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 58 of 71
<PAGE>
LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
-------------- --------------- -----------------
March 31, 2000 March 31, 1999 March 31, 1998/1/
-------------- --------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 8.51 $ 7.00
Income From Investment Operations
Net Investment Income (Loss) (0.03) 0.00/2/
Net Gains or (Losses) on Securities (both realized and unrealized) 5.82 1.51
------- -----------
Total From Investment Operations 5.79 1.51
------- -----------
Net Asset Value, End of Period $ 14.30 $ 8.51
======= ===========
Total Return 68.04 % 21.57 %/3/
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $251.55 $ 47.53
Ratio of Net Operating Expenses to Average Net Assets 1.04 % 1.05 %/4/
Ratio of Gross Operating Expenses to Average Net Assets/5/ 1.08 % 1.20 %/4/
Ratio of Net Investment Income/(Loss) to Average Net Assets (0.53)% (0.16)%/4/
Portfolio Turnover Rate 4 % 12 %/4/
</TABLE>
Notes:
1. Inception date of the Fund was October 1, 1997.
2. Amount represents less than $0.01 per share.
Page 59 of 71
<PAGE>
3. Not annualized.
4. Annualized.
5. Expense ratio before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 60 of 71
<PAGE>
OPTIMUM GROWTH FUND
<TABLE>
<CAPTION>
Year Ended March 31, Period Ended
-------------------------- -------------------
2000 1999 1998 March 31, 1997/1/
---- ------- ------- -------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 16.31 $ 10.18 $ 9.87
------- ------- -----------
Income From Investment Operations:
Net Investment Income (0.06) (0.01) 0.02
Net Gains or (losses) on Securities (both realized and unrealized) 11.15 6.15 0.31/2/
------- ------- -----------
Total From Investment Operations 11.09 6.14 0.33
------- ------- -----------
Less Distributions:
Dividends From Net Investment Income 0.00 (0.01) (0.02)
Distributions From Net Realized Gains on Investments and Options 0.00 0.00 0.00
------- ------- -----------
Total Distributions 0.00 (0.01) (0.02)
------- ------- -----------
Net Asset Value, End of Period $ 27.40 $ 16.31 $ 10.18
======= ======= ===========
Total Return 68.00 % 60.41% 3.31%/3/
======= ======= ===========
Ratios/Supplemental Data
Net Assets at end of Period (in millions) $ 12.41 $ 6.60 $ 3.36
Ratio of Net Operating Expenses to Average Net Assets 1.05 % 1.05 % 1.05%/5/
Ratio of Gross Operating Expenses to Average Net Assets/4/ 1.26 % 1.32 % 1.47%/5/
Ratio of Net Investment Income (Loss) to Average Net Assets (0.34)% (0.12)% 0.33%/5/
Portfolio Turnover 22 % 19 % 20%/5/
</TABLE>
1. Inception date of the Fund was July 3, 1996.
Page 61 of 71
<PAGE>
2. This amount does not accord with the aggregate net losses on investments
because of the timing of sales and repurchases of the shares in relation to
fluctuating market value of the investments in the Fund.
3. Not annualized.
4. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
5. Annualized.
Page 62 of 71
<PAGE>
SMALL CAP FUND
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- -------- ------- -------- -------
Net Asset Value, Beginning of Period $ 11.95 $ 8.83 10.78 $ 9.77
-------- ------- -------- -------
Income From Investment Operations
Net Investment Income (Loss) 0.00 (0.01) (0.03) (0.02)
Net Gains or (Losses) on Securities (both realized and unrealized) (2.56) 3.13 (1.43) 1.72
-------- ------- -------- -------
Total From Investment Operations (2.56) 3.12 (1.46) 1.70
-------- ------- -------- -------
Less Distributions
Distributions From Net Realized Gain on Investments and Options (0.12) 0.00 (0.10) (0.69)
Distributions in Excess of Net Realized Gain on Investments and Options 0.00 0.00 (0.39) 0.00
-------- ------- -------- -------
Total Distributions (0.12) 0.00 (0.49) (0.69)
-------- ------- -------- -------
Net Asset Value, End of Period $ 9.27 $ 11.95 $ 8.83 $ 10.78
======== ======= ======== =======
Total Return (21.41)% 35.33 % (14.33)% 18.29 %
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $ 43.79 $ 68.55 $ 53.26 $ 78.06
Ratio of Net Operating Expenses to Average Net Assets 0.94% 0.94 % 0.94 % 0.90 %
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.05% 1.01 % 1.02 % 0.98 %
Ratio of Net Investment Income/(Loss) to Average Net Assets (0.04)% (0.14)% (0.26)% (0.17)%
Portfolio Turnover Rate 115.0% 73.0 % 55.0 % 38.0 %
</TABLE>
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 63 of 71
<PAGE>
VALUE AND RESTRUCTURING FUND
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ------- ------- ------- ------
Net Asset Value, Beginning of Period $ 23.79 $ 15.93 $ 14.03 $10.55
------- ------- ------- ------
Income From Investment Operations
Net Investment Income 0.13 0.10 0.13 0.10
Net Gains on Securities (both realized and unrealized) 0.21 8.12 2.36 3.71
------- ------- ------- ------
Total From Investment Operations 0.34 8.22 2.49 3.81
------- ------- ------- ------
Less Distributions
Dividends From Net Investment Income (0.11) (0.09) (0.12) (0.09)
Distributions From Net Realized Gain on Investments and Options (0.14) (0.27) (0.47) (0.24)
------- ------- ------- ------
Total Distributions (0.25) (0.36) (0.59) (0.33)
------- ------- ------- ------
Net Asset Value, End of Period $ 23.88 $ 23.79 $ 15.93 $14.03
======= ======= ======= ======
Total Return 1.48% 52.10% 18.09% 36.48%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $594.62 $388.45 $124.01 $74.05
Ratio of Net Operating Expenses to Average Net Assets 0.93% 0.89% 0.91% 0.91%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.07% 0.93% 0.95% 0.95%
Ratio of Net Investment Income to Average Net Assets 0.59% 0.54% 0.90% 0.88%
Portfolio Turnover Rate 43.0% 30.0% 62.0% 56.0%
</TABLE>
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 64 of 71
<PAGE>
VALUE EQUITY FUND
<TABLE>
<CAPTION>
Year Ended March 31, Period Ended
------------------------ March 31,
2000 1999 1998 1997/1/
---- ------ ------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $16.11 $11.33 $ 12.08
------ ------ -------------
Income From Investment Operations:
Net Investment Income 0.08 0.07 0.01
Net Gains or (Losses) on Securities (both realized and unrealized) 0.55 5.57 (0.76)
------ ------ -------------
Total From Investment Operations 0.63 5.64 (0.75)
------ ------ -------------
Less Distributions:
Dividends From Net Investment Income (0.07) (0.06) 0.00
Distributions From Net Realized Gains on Investments and Options (1.32) (0.80) 0.00
------ ------ -------------
Total Distributions (1.39) (0.86) 0.00
------ ------ -------------
Net Asset Value, End of Period $15.35 $16.11 $ 11.33
====== ====== =============
Total Return 4.59% 51.09% (6.21)%/2/
====== ====== =============
Ratios/Supplemental Data
Net Assets at end of Period (in millions) $ 125 $ 78 $ 56
Ratio of Net Operating Expenses to Average Net Assets 1.05% 1.05% 1.05%/3/
Ratio of Gross Operating Expenses to Average Net Assets/4/ 1.32% 1.35% 1.43%/3/
Ratio of Net Investment Income (Loss) to Average Net Assets 0.53% 0.47% 0.54%/3/
Portfolio Turnover 55% 51% 64%/3/
</TABLE>
1. Inception date of the Fund was January 15, 1997.
Page 65 of 71
<PAGE>
2. Not annualized.
3. Annualized.
4. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 66 of 71
<PAGE>
ENERGY AND NATURAL RESOURCES FUND
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
2000 1999 1998 1997 1996
---- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.66 $11.12 $ 9.55 $ 7.92
-------- ------ ------ ------
Income From Investment Operations
Net Investment Income 0.10 0.09 0.09 0.07
Net Gains or (Losses) on Securities (both realized and unrealized) (1.65) 2.69 2.60 1.63
-------- ------ ------ ------
Total From Investment Operations (1.55) 2.78 2.69 1.70
-------- ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.09) (0.10) (0.09) (0.07)
Distributions From Net Realized Gain on Investments and Options 0.00 (1.07) (1.03) 0.00
Distributions in Excess of Net Realized Gain on Investments and Options 0.00 (0.07) 0.00 0.00
-------- ------ ------ ------
Total Distributions (0.09) (1.24) (1.12) (0.07)
Net Asset Value, End of Period $ 11.02 $12.66 $11.12 $ 9.55
======== ====== ====== ======
Total Return (12.23)% 24.97% 28.28% 21.60%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $ 43.02 $46.17 $33.39 $23.29
Ratio of Net Operating Expenses to Average Net Assets 0.98 % 0.99% 0.93% 0.96%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.09 % 1.07% 0.98% 1.09%
Ratio of Net Investment Income to Average Net Assets 0.97 % 0.69% 0.84% 0.88%
Portfolio Turnover Rate 96.0 % 88.0% 87.0% 43.0%
</TABLE>
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 67 of 71
<PAGE>
REAL ESTATE FUND
<TABLE>
<CAPTION>
Year ended Year ended Period ended
-------------- --------------- ------------------
March 31, 2000 March 31, 1999 March 31, 1998/1/
-------------- --------------- ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.05 $ 7.00
-------- ---------
Income From Investment Operations
Net Investment Income 0.33 0.15
Net Gains or (Losses) on Securities (both realized and unrealized) (1.55) 0.01
-------- ---------
Total From Investment Operations (1.22) 0.16
-------- ---------
Less Distributions
Dividends From Net Investment Income (0.33) (0.11)
Total Distributions (0.33) (0.11)
-------- ---------
Net Asset Value, End of Period $ 5.50 $ 7.05
======== =========
Total Return (17.55)% 2.26%/2/
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $ 32.84 $ 41.17
Ratio of Net Operating Expenses to Average Net Assets 1.20 % 1.20%/3/
Ratio of Gross Operating Expenses to Average Net Assets/4/ 1.43 % 1.40%/3/
Ratio of Net Investment Income to Average Net Assets 5.37 % 5.02%/3/
Portfolio Turnover Rate 28.0 % 30.0%/3/
</TABLE>
Page 68 of 71
<PAGE>
Notes:
1. Inception date of the Fund was October 1, 1997.
2. Not annualized.
3. Annualized.
4. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 69 of 71
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
INVESTMENT ADVISER
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036
U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905
DISTRIBUTOR
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
More information about each Fund is available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAIs dated August 1, 2000 include detailed information about Excelsior
Funds, Inc. and Excelsior Institutional Trust. The SAIs are on file with the
SEC and are incorporated by reference into this prospectus. This means that the
SAIs, for legal purposes, are a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, and recent market conditions and trends and
their impact on Fund performance.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: CALL (800) 466-1012 (FROM OVERSEAS, CALL (617) 557-8280)
BY MAIL:
Excelsior Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913
BY INTERNET: http://www.excelsiorfunds.com
Page 70 of 71
<PAGE>
FROM THE SEC: You can also obtain the SAIs or the Annual and Semi-Annual
reports, as well as other information about Excelsior Funds, Inc. and Excelsior
Institutional Trust, from the EDGAR Database on the SEC's website
("http://www.sec.gov"). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information on the operation of the Public
Reference Room, call 202-942-8090). You may request documents by mail from the
SEC, upon payment of a duplicating fee, by writing to: Securities and Exchange
Commission, Public Reference Section, Washington, DC 20549-0102. You may also
obtain this information, upon payment of a duplicating fee, by e-mailing the SEC
at the following address: [email protected]. Excelsior Funds, Inc.'s and
Excelsior Institutional Trust's Investment Company Act registration numbers are
811-4088 and 811-8490, respectively.
Page 71 of 71
<PAGE>
Excelsior Funds, Inc
International Funds
Prospectus
August 1, 2000
International Fund
Latin America Fund
Pacific/Asia Fund
Pan European Fund
Emerging Markets Fund
Investment Adviser
United States Trust Company of New York
U.S. Trust Company
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
1 of 50
<PAGE>
Table of Contents
Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals and strategies.
This prospectus gives you important information about the International, Latin
America, Pacific/Asia, Pan European, and Emerging Markets Funds (each, a Fund)
that you should know before investing. Please read this prospectus and keep it
for future reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:
<TABLE>
<CAPTION>
Page
<S> <C>
International Fund.................................... XX
Latin America Fund.................................... XX
Pacific/Asia Fund..................................... XX
Pan European Fund..................................... XX
Emerging Markets Fund................................. XX
More Information About Risk........................... XX
More Information About Fund Investments............... XX
The Investment Adviser and Portfolio Managers......... XX
Purchasing, Selling and Exchanging Fund Shares........ XX
Dividends and Distributions........................... XX
Taxes................................................. XX
Financial Highlights.................................. XX
How to Obtain More Information About
Excelsior Funds, Inc............................... Back Cover
</TABLE>
2 of 50
<PAGE>
Introduction - Risk/Return Information common to The funds
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund invests primarily in securities of companies that are located in or
conduct a substantial amount of their business in foreign countries, including
emerging market countries. Prices of securities in foreign markets generally,
and emerging markets in particular, have historically been more volatile than
prices in U.S. markets. In addition, to the extent that a Fund focuses its
investments in a particular region, the effects of political and economic events
in that region on the value of your investment in a Fund will be magnified.
Each Fund has its own investment goal and strategies for reaching that goal.
The investment managers invest Fund assets in a way that they believe will help
a Fund achieve its goal. Still, investing in each Fund involves risk and there
is no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in the
Fund, just as you could with other investments. A Fund share is not a bank
deposit and it is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities a Fund owns and the markets in which they trade. The
effect on a Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.
3 of 50
<PAGE>
International Fund
Fund Summary
<TABLE>
<CAPTION>
Investment Goal Total return through long-term capital appreciation and
income
<S> <C>
Investment Focus Foreign equity securities
Share Price Volatility High
Principal Investment Strategy Investing in a diversified portfolio of equity securities
of issuers in developed foreign countries and, to a lesser
extent, emerging markets
Investor Profile Investors seeking long-term capital appreciation, who are
willing to accept the risks and price volatility of
investing in companies located in foreign countries
</TABLE>
Investment Objective
The International Fund seeks total return on its assets through capital
appreciation and income.
Investment Strategy of the International Fund
The International Fund invests primarily (at least 65% of its assets) in equity
securities of larger, more established companies located in developed foreign
markets, which include most nations in western Europe and the more developed
nations in the Pacific Basin and Latin America. The Fund may invest to a lesser
extent in less developed countries and regions to capitalize on opportunities in
emerging markets. The Adviser generally does not attempt to hedge the effects
of currency value fluctuations on the Fund's investments on an on-going basis.
The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in a broad range of foreign markets, giving particular emphasis to each
company's scope of operations and economic ties to one or more specific
countries. While the Fund generally invests in companies in a variety of
countries, industries and sectors, the Adviser does not attempt to invest a
specific percentage of the Fund's assets in a given country, region or industry.
The Fund will make investments in companies located in emerging markets only
where the Adviser believes that such companies' growth/appreciation potential
transcends their location or operations in emerging market countries.
4 of 50
<PAGE>
Principal Risks of Investing in the International Fund
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily affect the U.S. economy or
similar issuers located in the United States. In addition, investments in
foreign countries are generally denominated in a foreign currency. As a result,
changes in the value of those currencies compared to the U.S. dollar may affect
(positively or negatively) the value of a Fund's investments. These currency
movements may happen separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country. These
various risks will be even greater for investments in emerging market countries
since political turmoil and rapid changes in economic conditions are more likely
to occur in these countries.
The Fund is also subject to the risk that foreign equity securities may
underperform other segments of the equity market or the equity market as a
whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<CAPTION>
<S> <C> <C>
1990 (9.39)%
1991 5.93%
1992 (9.36)%
1993 36.54%
1994 (2.00)%
1995 7.27%
1996 7.28%
1997 9.25%
1998 7.89%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
5 of 50
<PAGE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the MSCI EAFE Index and the MSCI ACWI Free
ex U.S. Index.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------------------
International Fund X.XX% X.XX% X.XX%
MSCI EAFE Index X.XX% X.XX% X.XX%
MSCI ACWI Free ex U.S. Index X.XX% X.XX% X.XX%
</TABLE>
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Shareholder Fees (paid directly from your investment)
<TABLE>
<S> <C>
Redemption Fee (as a percentage of amount redeemed, if applicable)* 2.00%
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)**
<TABLE>
<CAPTION>
Management Fees X.XX%
<S> <C> <C>
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- --------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- --------------------------------------------------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
</TABLE>
6 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
* This redemption fee is charged if you redeem or exchange your shares within 30 days of the date of
purchase. See "How to Sell Your Shares" for more information.
** The Adviser has contractually agreed to waive fees and reimburse expenses in order to keep total
operating expenses from exceeding [X.XX%], for a period of one year from the date of this prospectus.
For more information about these fees, see "Investment Adviser and Portfolio Managers."
</TABLE>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXX $XXX
</TABLE>
7 of 50
<PAGE>
Latin America Fund
Fund Summary
<TABLE>
<CAPTION>
<S> <C>
Investment Goal Long-term capital appreciation
Investment Focus Equity securities of Latin American issuers
Share Price Volatility Very high
Principal Investment Strategy Investing in a diversified portfolio of equity securities
of companies located in Latin America
Investor Profile Investors seeking long-term capital appreciation, who are
willing to accept the risks and possibly extreme price
volatility of investing in Latin American issuers
</TABLE>
Investment Objective
The Latin America Fund seeks long-term capital appreciation.
Investment Strategy of the latin America Fund
The Latin America Fund invests primarily (at least 65% of its assets) in equity
securities of larger, more established companies in Latin America, which
includes Central and South America. The Adviser generally does not attempt to
hedge the effects of currency value fluctuations on the Fund's investments on an
on-going basis.
The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in the Latin American markets, giving particular emphasis to each company's
scope of operations and economic ties to one or more specific countries. While
the Fund generally invests in companies in a variety of countries, industries
and sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry.
Principal Risks of Investing in the Latin America Fund
The Fund invests primarily in securities of issuers located in a single
geographic region - Latin America. The economic and political environments of
countries in a particular region frequently are interrelated and the value of
regional markets and issuers often will rise and fall together. As a result,
the Fund is subject to the risk that political and economic events will affect a
larger portion of the Fund's investments than if the Fund's investments were
more geographically diversified. The Fund's focus on Latin America also
increases its potential share price volatility.
8 of 50
<PAGE>
The Latin American economies have experienced considerable difficulties,
including high inflation rates, high interest rates and currency devaluations.
As a result, Latin American securities markets have experienced extraordinary
volatility. Emergence of the Latin American economies and securities markets
will require sustained economic and fiscal discipline, which has been lacking in
the past, as well as stable political and social conditions. Development also
may be influenced by international economic conditions, particularly those in
the United States, and by world prices for oil and other commodities.
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. Such events will not necessarily affect the U.S. economy or
similar issuers located in the United States. The risks will be even greater
for investments in emerging market countries since political turmoil and rapid
changes are more likely to occur in these countries.
The Fund is also subject to the risk that Latin American equity securities may
underperform other segments of the equity market or the equity markets as a
whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<CAPTION>
<S> <C> <C>
1993 39.73%
1994 (10.67)%
1995 (10.57)%
1996 24.88%
1997 25.15%
1998 (47.70)%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
9 of 50
<PAGE>
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the MSCI EMF Latin America Index.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 5 Years Since Inception
- -------------------------------------------------------------------------------------------
Latin America Fund X.XX% X.XX% X.XX%*
MSCI EMF Latin America Index X.XX% X.XX% X.XX%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Shareholder Fees (paid directly from your investment)
<TABLE>
<CAPTION>
<S> <C>
Redemption Fee (as a percentage of amount redeemed, if applicable)* 2.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)**
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- --------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- --------------------------------------------------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
* This redemption fee is charged if you sell your shares within 30 days within the date of purchase.
</TABLE>
10 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
** The Adviser has contractually agreed to waive fees and reimburse expenses in order to keep total
operating expenses from exceeding [X.XX%], for a period of one year from the date of this prospectus.
For more information about these fees, see "Investment Adviser and Portfolio Managers."
</TABLE>
11 of 50
<PAGE>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXXX $XXXX
</TABLE>
12 of 50
<PAGE>
Pacific/Asia Fund
Fund Summary
<TABLE>
<CAPTION>
<S> <C>
Investment Goal Long-term capital appreciation
Investment Focus Equity securities of Asian issuers
Share Price Volatility Very high
Principal Investment Strategy Investing in a diversified portfolio of equity securities
of companies located in Asia
Investor Profile Investors seeking long-term capital appreciation, who are
willing to accept the risks and possibly extreme price
volatility of investing in Asian issuers
</TABLE>
Investment Objective
The Pacific/Asia Fund seeks long-term capital appreciation.
Investment Strategy of the Pacific/Asia Fund
The Pacific/Asia Fund invests primarily (at least 65% of its assets) in equity
securities of larger, more established companies located in Asia and the Pacific
Basin, including Australia, New Zealand and India. The Adviser generally does
not attempt to hedge the effects of currency value fluctuations on the Fund's
investments on an on-going basis.
The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in the Pacific Basin markets, giving particular emphasis to each company's scope
of operations and economic ties to one or more specific countries. While the
Fund generally invests in companies in a variety of countries, industries and
sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry.
Principal Risks of Investing in the Pacific/Asia Fund
The Fund invests primarily in securities of issuers located in a single
geographic region - the Pacific Basin. The economic and political environments
of countries in a particular region frequently are interrelated and the value of
regional markets and issuers often will rise and fall together. As a result,
the Fund is subject to the risk that political and economic events will affect a
larger portion of the Fund's investments than if the Fund's investments were
more
13 of 50
<PAGE>
geographically diversified. The Fund's focus on the Pacific Basin also increases
its potential share price volatility.
The Pacific Basin economies have experienced considerable difficulties,
including, at various times, high inflation rates, high interest rates and
currency devaluations. As a result, Pacific Basin securities markets have
experienced extraordinary volatility. Continued growth of the Pacific Basin
economies and securities markets will require sustained economic and fiscal
discipline, which has been lacking in the past, as well as continued commitment
to governmental reforms. Development also may be influenced by international
economic conditions, particularly those in the United States and Japan, and by
world demand for goods produced in Pacific Basin countries.
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. Such events will not necessarily affect the U.S. economy or
similar issuers located in the United States. The risks will be even greater
for investments in emerging market countries since political turmoil and rapid
changes are more likely to occur in these countries. These risks are discussed
in greater detail in the section entitled "More Information About Risk."
The Fund is also subject to the risk that Pacific Basin equity securities may
underperform other segments of the equity market or the equity markets as a
whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
14 of 50
<PAGE>
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<CAPTION>
<S> <C> <C>
1993 66.25%
1994 (14.69)%
1995 8.50%
1996 7.23%
1997 (32.15)%
1998 (1.76)%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the MSCI AC Asia Pacific Index.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 5 Years Since Inception
- -------------------------------------------------------------------------------------------
Pacific/Asia Fund X.XX% X.XX% X.XX%*
MSCI AC Asia Pacific Index X.XX% X.XX% X.XX%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Shareholder Fees (paid directly from your investment)
<TABLE>
<CAPTION>
<S> <C>
Redemption Fee (as a percentage of amount redeemed, if applicable)* 2.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)**
</TABLE>
15 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- --------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- --------------------------------------------------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
* This redemption fee is charged if you sell your shares within 30 days within the date of purchase.
** The Adviser has contractually agreed to waive fees and reimburse expenses in order to keep total
operating expenses from exceeding [X.XX%], for a period of one year from the date of this prospectus.
For more information about these fees, see "Investment Adviser and Portfolio Managers."
</TABLE>
16 of 50
<PAGE>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXXX $XXXX
</TABLE>
17 of 50
<PAGE>
Pan European Fund
Fund Summary
<TABLE>
<CAPTION>
<S> <C>
Investment Goal Long-term capital appreciation
Investment Focus Equity securities of European issuers
Share Price Volatility High
Principal Investment Strategy Investing in a diversified portfolio of equity securities
of companies located in Europe
Investor Profile Investors seeking long-term capital appreciation, who are
willing to accept the risks and price volatility of
investing in European issuers
</TABLE>
Investment Objective
The Pan European Fund seeks long-term capital appreciation.
Investment Strategy of the Pan European Fund
The Pan European Fund invests primarily (at least 65% of its assets) in equity
securities of larger, more established companies located in the more developed
countries of Europe. The Fund may invest to a lesser extent in the less
developed countries to capitalize on opportunities in the emerging markets of
Eastern Europe. The Adviser generally does not attempt to hedge the effects of
currency value fluctuations on the Fund's investments on an on-going basis.
The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in the European markets, giving particular emphasis to each company's scope of
operations and economic ties to one or more specific countries. While the Fund
generally invests in companies in a variety of countries, industries and
sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry.
Principal Risks of Investing in the Pan European Fund
The Fund invests primarily in securities of issuers located in a single
geographic region - Europe. The economic and political environments of
countries in a particular region frequently are interrelated and the value of
regional markets and issuers often will rise and fall together. As a result,
the Fund is subject to the risk that political and economic events will affect a
larger
18 of 50
<PAGE>
portion of the Fund's investments than if the Fund's investments were more
geographically diversified. The Fund's focus on Europe also increases its
potential share price volatility.
European countries have, at times, experienced economic difficulties, including
recession, currency fluctuations, and armed conflicts. In addition, the
emerging economies of Eastern Europe have experienced political and economic
difficulties related to their efforts to transition to free-market economies.
As a result, securities markets in Europe, particularly those in Eastern Europe,
have experienced price volatility.
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. Such events will not necessarily affect the U.S. economy or
similar issuers located in the United States. The risks will be even greater
for investments in emerging market countries since political turmoil and rapid
changes are more likely to occur in these countries. These risks are discussed
in greater detail in the section entitled "More Information About Risk."
The Fund is also subject to the risk that European equity securities may
underperform other segments of the equity market or the equity markets as a
whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<CAPTION>
<S> <C>
1993 17.26%
1994 0.04%
1995 14.90%
1996 21.64%
1997 24.29%
1998 11.78%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
19 of 50
<PAGE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
20 of 50
<PAGE>
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the MSCI Europe Index.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 5 Years Since Inception
- -------------------------------------------------------------------------------------------
Pan European Fund XX.XX% XX.XX% XX.XX%*
MSCI Europe Index XX.XX% XX.XX% XX.XX%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Shareholder Fees (paid directly from your investment)
<TABLE>
<CAPTION>
<S> <C> <C>
Redemption Fee (as a percentage of amount redeemed, if applicable)* 2.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)**
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- --------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- --------------------------------------------------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
* This redemption fee is charged if you sell your shares within 30 days within the date of purchase.
</TABLE>
21 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
** The Adviser has contractually agreed to waive fees and reimburse expenses in order to keep total
operating expenses from exceeding [X.XX%], for a period of one year from the date of this prospectus.
For more information about these fees, see "Investment Adviser and Portfolio Managers."
</TABLE>
22 of 50
<PAGE>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXX $XXXX
</TABLE>
23 of 50
<PAGE>
Emerging Markets Fund
Fund Summary
<TABLE>
<CAPTION>
<S> <C>
Investment Goal Long-term capital appreciation
Investment Focus Equity securities of emerging markets issuers
Share Price Volatility Very high
Principal Investment Strategy Investing in a diversified portfolio of equity securities of
companies located in emerging markets
Investor Profile Investors seeking long-term capital appreciation, who are
willing to accept the risks and extreme price volatility of
investing in emerging markets issuers
</TABLE>
Investment Objective
The Emerging Markets Fund seeks long-term capital appreciation. This objective
may be changed without shareholder approval.
Investment Strategy of the Emerging Markets Fund
The Emerging Markets Fund invests primarily (at least 65% of its assets) in
equity securities of companies located in emerging market countries. Emerging
market countries are those that major international financial institutions, such
as the World Bank, generally consider to be less economically mature than
developed nations, such as the United States or most nations in Western Europe.
The Adviser generally does not attempt to hedge the effects of currency value
fluctuations on the Fund's investments on an on-going basis.
The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global or regional economic
trends or promising technologies or products and whose value is not recognized
in the prices of their securities. The Adviser continuously analyzes companies
in emerging markets, giving particular emphasis to each company's scope of
operations and economic ties to one or more specific countries. While the Fund
generally invests in companies in a variety of countries, industries and
sectors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country or industry.
Principal Risks of Investing in the Emerging Markets Fund
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the
24 of 50
<PAGE>
value of the Fund's securities may fluctuate substantially from day to day.
Individual companies may report poor results or be negatively affected by
industry and/or economic trends and developments. The prices of securities
issued by such companies may suffer a decline in response. These factors
contribute to price volatility, which is the principal risk of investing in the
Fund.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily affect the U.S. economy or
similar issuers located in the United States. In addition, investments in
foreign countries are generally denominated in a foreign currency. As a result,
changes in the value of those currencies compared to the U.S. dollar may affect
(positively or negatively) the value of a Fund's investments. These currency
movements may happen separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country. These
various risks will be even greater for investments in emerging market countries
since political turmoil and rapid changes in economic conditions are more likely
to occur in these countries.
Emerging market countries are countries that the World Bank or the United
Nations considers to be emerging or developing. Emerging markets may be more
likely to experience political turmoil or rapid changes in market or economic
conditions than more developed countries. In addition, the financial stability
of issuers (including governments) in emerging market countries may be more
precarious than in other countries. As a result, there will tend to be an
increased risk of price volatility associated with the Fund's investments in
emerging market countries, which may be magnified by currency fluctuations
relative to the U.S. dollar.
The Fund is also subject to the risk that emerging market equity securities may
underperform other segments of the equity market or the equity markets as a
whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<CAPTION>
<S> <C> <C>
1998 (41.21)%
1999 X.XX%
BEST QUARTER WORST QUARTER
XX.XX% XX.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the MSCI EMF (Emerging Markets Free) Index.
25 of 50
<PAGE>
<TABLE>
<CAPTION>
Since Inception
- -----------------------------------------------------------------------
<S> <C>
Emerging Markets Fund XX.XX%*
MSCI EMF (Emerging Markets Free) Index XX.XX%**
</TABLE>
* Since January 2, 1998
** Since December 31, 1997
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
<TABLE>
<CAPTION>
<S> <C>
Shareholder Fees (paid directly from your investment)
Redemption Fee (as a percentage of amount redeemed, if applicable)* 2.00%
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)**
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- --------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- --------------------------------------------------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
</TABLE>
<TABLE>
<CAPTION>
* This redemption fee is charged if you sell your shares within 30 days within the date of purchase.
<S> <C>
** The Adviser has contractually agreed to waive fees and reimburse expenses in order to keep total
operating expenses from exceeding [X.XX%], for a period of one year from the date of this
</TABLE>
26 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
prospectus. For more information about these fees, see "Investment Adviser and Portfolio Managers."
</TABLE>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXXX $XXXX
</TABLE>
27 of 50
<PAGE>
More Information About Risk
<TABLE>
<CAPTION>
<S> <C>
Equity Risk - Equity securities include public All Funds
and privately issued equity securities, common
and preferred stocks, warrants, rights to
subscribe to common stock and convertible
securities, as well as instruments that attempt
to track the price movement of equity indices.
Investments in these securities in general are
subject to market risks that may cause their
prices to fluctuate over time. The value of
securities convertible into equity securities,
such as warrants or convertible debt, is also
affected by prevailing interest rates, the
credit quality of the issuer and any call
provision.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Foreign Security Risks -- Investments in All Funds
securities of foreign companies or governments
can be more volatile than investments in U.S.
companies or governments. Diplomatic,
political, or economic developments, including
nationalization or appropriation, could affect
investments in foreign countries. Foreign
securities markets generally have less trading
volume and less liquidity than U.S. markets.
In addition, the value of securities
denominated in foreign currencies, and of
dividends from such securities, can change
significantly when foreign currencies
strengthen or weaken relative to the U.S.
dollar. Foreign companies or governments
generally are not subject to uniform
accounting, auditing, and financial reporting
standards comparable to those applicable to
domestic U.S. companies or governments.
Transaction costs are generally higher than
those in the U.S. and expenses for custodial
arrangements of foreign securities may be
somewhat greater than typical expenses for
custodial arrangements of similar U.S.
securities. Some foreign governments levy
</TABLE>
28 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
withholding taxes against dividend and interest
income. Although in some countries a portion
of these taxes are recoverable, the
non-recovered portion will reduce the income
received from the securities comprising the
portfolio.
</TABLE>
29 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Emerging Market Risks - Emerging market All Funds
countries are countries that the World Bank or
the United Nations considers to be emerging or
developing. Emerging markets may be more
likely to experience political turmoil or rapid
changed in market or economic conditions than
more developed countries. In addition, the
financial stability of issuers (including
governments) in emerging markets countries may
be more precarious than in other countries. As
a result, there will tend to be an increased
risk of price volatility associated with the
Funds' investments in emerging market
countries, which may be magnified by currency
fluctuations relative to the U.S. dollar.
</TABLE>
30 of 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Currency Risk - Investments in foreign All Funds
securities denominated in foreign currencies
involve additional risks, including:
. A Fund may incur substantial costs in
connection with conversions between various
currencies.
. Only a limited market currently exists for
hedging transactions relating to currencies in
certain emerging markets.
</TABLE>
31 of 50
<PAGE>
More Information About Fund Investments
In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During adverse economic, market or other
conditions, each Fund may take temporary defensive positions such as investing
up to 100% of its assets in investments that would not ordinarily be consistent
with a Fund's objective. The Fund may not achieve its objective when so
invested. A Fund will do so only if the Adviser believes that the risk of loss
outweighs the opportunity for capital gains or higher income. Of course, a Fund
cannot guarantee that it will achieve its investment goal.
Investment Adviser
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.
On January 13, 2000, The Charles Schwab Corporation ("Schwab") and U.S. Trust
Corporation announced that they had signed an agreement to merge (the "Merger").
The Merger is subject to the approval of U.S. Trust Corporation shareholders and
is expected to close in the second quarter of 2000. Under the terms of the
agreement, U.S. Trust Corporation will retain its name and continue to provide
investment management, fiduciary, financial planning and private banking
services. As a result, U.S. Trust will continue to serve as the investment
adviser to the Funds. The Merger, however, will represent a change of ownership
of the Adviser's parent corporation and, as such, will have the effect under the
Investment Company Act of 1940 of terminating the existing advisory agreements
between Excelsior Funds, Inc. and the Adviser.
As a consequence of the Merger and in order to facilitate the investment
management of the Funds, the Board of Directors of Excelsior Funds, Inc.
approved a new advisory agreement with the Adviser on March 3, 2000. The new
advisory agreement was subsequently approved by a vote of shareholders of the
Funds at a meeting held on May 3, 2000. The new advisory agreement will become
effective on the date of the Merger.
U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. On December 31, 1999,
U.S. Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W. 47th
Street, New York, NY 10036. U.S. Trust Company has its principal offices at 225
High Ridge Road, East Building, Stamford, CT 06905.
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<PAGE>
The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.
The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.
For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:
<TABLE>
<CAPTION>
<S> <C>
International Fund [X.XX%]
Latin America Fund [X.XX%]
Pacific/Asia Fund [X.XX%]
Pan European Fund [X.XX%]
</TABLE>
33 of 50
<PAGE>
Emerging Markets Fund [X.XX%]
Portfolio Managers
Rosemary Sagar has served as the International and Pan European Funds' portfolio
manager since 1996. Ms. Sagar, Managing Director of U.S. Trust's Global
Investment Division, has been with U.S. Trust since 1996. From 1991 to 1996,
Ms. Sagar was Senior Vice President for international equity investments for
General Electric Investments Corp. in Stamford, CT. Ms. Sagar is primarily
responsible for the day-to-day management of the International and Pan European
Funds' portfolios. Research, analyses, trade execution and other facilities
provided by U.S. Trust and other personnel also play a significant role in
portfolio management and performance.
Donald Elefson and Janette Antiles have served as the co-managers of the Latin
America and Emerging Markets Funds since August, 1999. Mr. Elefson, a Senior
Vice President of U.S. Trust's Global Investment Division, has been with U.S.
Trust since 1998. From 1994 through 1998, Mr. Elefson was a portfolio manager
with Smith Barney. Ms. Antiles, a Vice President of U.S. Trust's Global
Investment Division, has been with U.S. Trust since 1997. Prior to U.S. Trust,
Ms. Antiles was an analyst with Bankers Trust in 1996. From 1992 through 1995,
Ms. Antiles was a financial analyst with Goldman, Sachs. Mr. Elefson and Ms.
Antiles are the persons primarily responsible for the day to day management of
the Latin America and Emerging Markets Funds. Research, analyses, trade
execution and other facilities provided by U.S. Trust and other personnel also
play a significant role in portfolio management and performance.
David J. Linehan has served as the Pacific/Asia Fund's portfolio manager since
1998. Mr. Linehan, a Senior Vice President in U.S. Trust's Global Investment
Division, has been with U.S. Trust since July 1998. Prior to joining U.S.
Trust, Mr. Linehan was an international investment manager with Cowen Asset
Management in New York from August 1995 to July 1998. From January 1995 to
August 1995, Mr. Linehan was vice president in Asian equity sales with Duetsche
Morgan Grenfell in New York and a vice president in Asian equity sales with Mees
Pierson from August 1994 to December 1994. Prior to joining Mees Pierson, Mr.
Linehan was an associate portfolio manager with Kemper Financial Services in
Chicago since September 1989. Mr. Linehan is primarily responsible for the day
to day management of the Pacific/Asia Fund's portfolio. Research, analyses,
trade execution and other facilities provided by U.S. Trust and other personnel
also play a significant role in portfolio management and performance.
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<PAGE>
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange shares of the Funds.
How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
. Telephone
. Wire, or
. Automatic Investment Program
To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to
Excelsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire or through the automatic
investment program, write your check, payable in U.S. dollars, to "Excelsior
Funds" and include the name of the appropriate Fund(s) on the check. A Fund
cannot accept third-party checks, credit cards, credit card checks or cash. To
purchase shares by wire, please call us for instructions. Federal funds and
registration instructions should be wired through the Federal Reserve System to:
The Chase Manhattan Bank
ABA#021000021
Excelsior Funds, Account Number 9102732915
For Further Credit To:
Excelsior Funds
[Wire Control Number
Excelsior Funds Account Registration
(including account number)]
Investors making initial investments by wire must promptly complete the enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your broker or institution may charge a fee for its services, in addition to the
fees charged by the Fund. You will also generally have to address your
correspondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.
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<PAGE>
General Information
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). A Fund may reject any
purchase request if it is determined that accepting the request would not be in
the best interest of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good order.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received.
Each Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So,
for you to receive the current Business Day's NAV, a Fund must receive your
purchase request in good order before 4:00 p.m. Eastern time.
How We Calculate NAV
NAV for one Fund share is the value of that share's portion of the net assets of
the Fund.
In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser thinks that they are
unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Directors. Fixed income investments with remaining
maturities of 60 days or less generally are valued at their amortized cost,
which approximates their market value.
Some Funds may hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the market value of a Fund's investments may change on days
when you cannot purchase or sell Fund shares.
Minimum Purchases
To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in any Fund.
Your subsequent investments in any Fund must be made in amounts of at least $50.
A Fund may accept investments of smaller amounts at its discretion.
Automatic Investment Program
If you have a checking, money market or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.
With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.
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<PAGE>
How to Sell Your Fund Shares
You may sell shares directly by:
. Mail
. Telephone, or
. Systematic Withdrawal Plan
Holders of Fund shares may sell (sometimes called "redeem") shares by following
the procedures established when they opened their account or accounts. If you
have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).
You may sell your shares by sending a written request for redemption to:
Excelsior Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012 (from
overseas, call (617) 557-8280). The minimum amount for telephone redemptions is
$500. We may reject a telephone redemption request if we deem it advisable to
do so.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or
institution may charge a fee for its services, in addition to the fees charged
by the Fund.
If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.
A redemption fee of 2% of the value of the shares redeemed or exchanged will be
imposed on shares in a Fund redeemed or exchanged 30 days or less after their
date of purchase. The redemption fee is intended to limit short-term trading in
the Funds or, to the extent that short-term trading persists, to impose the
costs of that type of activity on the shareholders who engage in it. The
redemption fee will be paid to the appropriate Fund. Each Fund reserves the
right, at its discretion, to waive, modify or terminate the redemption fee. No
redemption fees will be charged on redemptions and exchanges that occur as a
result of (i) a bona fide investment policy committee decision of a recognized
financial institution with respect to an asset allocation program, (ii) shares
acquired through the reinvestment of dividends or capital gains distributions
or (iii) shares redeemed as part of a systematic withdrawal plan that represent
4% or less of the investment subject to the plan account. For purposes of
omnibus accounts, the redemption fee will be determined at the sub-account
level.
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<PAGE>
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.
Receiving Your Money
Normally, we will send your sale proceeds within five Business Days after we
receive your request in good order. Your proceeds can be wired to your bank
account (if more than $500) or sent to you by check. If you recently purchased
your shares by check, redemption proceeds may not be available until your check
has cleared (which may take up to 15 days from your purchase).
Redemptions in Kind
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes on
any capital gains from the sale as with any redemption.
Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be
required to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
Suspension of Your Right to Sell Your Shares
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.
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<PAGE>
How to Exchange Your Shares
You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for shares of any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or
by telephone if you previously selected the telephone exchange option on the
account application.
You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.
If you recently purchased shares by check, you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your
purchase). This exchange privilege may be changed or canceled at any time upon
60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.
There is a 2.00% redemption fee on shares exchanged within 30 days of purchase.
See "How to Sell Your Shares" above for more information.
Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards
and procedures to confirm the identity of callers and the authenticity of
instructions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.
Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund shares.
These intermediaries may authorize other organizations to accept purchase,
redemption and exchange requests for Fund shares. These requests are normally
executed at the NAV next determined after the intermediary receives the request
in good order. Authorized intermediaries are responsible for transmitting
requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay a shareholder servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.40% of the average
daily net asset value of Fund shares held by clients of a shareholder
organization.
39 of 50
<PAGE>
Dividends and Distributions
Each Fund distributes dividends from its income semi-annually.
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends
and distributions in the form of additional Fund shares unless you elect to
receive payment in cash. To elect cash payment, you must notify the Fund in
writing prior to the date of the distribution. Your election will be effective
for dividends and distributions paid after the Fund receives your written
notice. To cancel your election, simply send the Fund written notice.
Taxes
Each Fund will distribute substantially all of its taxable income including its
net capital gain (the excess of long-term capital over short-term capital
loss), if any. Distributions you receive from a Fund will generally be taxable
to you regardless of whether they are paid in cash or reinvested in additional
shares. Distributions attributable to the net capital gain of a Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares. Other Fund distributions will generally be taxable as ordinary
income.
It is expected that each Fund will be subject to foreign withholding taxes with
respect to dividends or interest received from sources in foreign countries.
Each Fund may make an election to treat a proportionate amount to such taxes as
constituting a distribution to each shareholder, which would allow each
shareholder either (1) to credit such proportionate amount of taxes against U.S.
federal income tax liability or (2) to take such amount as an itemized
deduction.
You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes return of capital. This
is known as "buying into a dividend."
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<PAGE>
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to extent of any capital gain dividends that were
received on the shares.
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or localities
within the state.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, may
be subject to different United States federal income tax treatment. You should
consult your tax adviser for further information regarding federal, state, local
and/ foreign tax consequences relevant to your specific situation.
More information about taxes is in the Statement of Additional Information.
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<PAGE>
Financial Highlights
The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's financial
performance for the past five years, or, if shorter, the period of the Fund's
operations. Some of this information reflects financial information for a
single Fund share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in a Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
_________________, independent public accountants. Their report, along with
each Fund's financial statements, are incorporated by reference into our
Statement of Additional Information. You can obtain the annual report, which
contains more performance information, at no charge by calling (800)-446-1012
(from overseas, call (617) 557-8280).
42 of 50
<PAGE>
International Fund
<TABLE>
<CAPTION>
-------------------------------------------
Year Ended March 31,
-------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
------ ------- ------- ------- ------
Net Asset Value, Beginning of Year $ 13.00 $ 11.34 $ 10.91 $ 9.82
------- ------- ------- ------
Income From Investment Operations
Net Investment Income 0.01 0.04 0.09 0.10
Net Gains or (Losses) on Securities (both realized and unrealized) (0.42) 2.11 0.63 1.15
------- ------- ------- ------
Total From Investment Operations (0.41) 2.15 0.72 1.25
------- ------- ------- ------
Less Distributions
Dividends From Net Investment Income (0.03) (0.02) (0.10) (0.08)
Dividends in Excess of Net Investment Income (0.04) (0.04) (0.00) (0.01)
Distributions From Net Realized Gain on Investments 0.00 (0.31) (0.19) (0.07)
Distributions in Excess of Net Realized Gain on Investments 0.00 (0.12) 0.00 0.00
------- ------- ------- ------
Total Distributions (0.07) (0.49) (0.29) (0.16)
------- ------- ------- ------
Net Asset Value, End of Year $ 12.52 $ 13.00 $ 11.34 $10.91
------- ------- ------- ------
Total Return (3.18)% 19.42% 6.78% 12.77%
Ratios/Supplemental Data
Net Assets, End of Period (in Millions) $202.08 $204.89 $126.82 $97.85
Ratio of Net Operating Expenses to Average Net Assets 1.42% 1.44% 1.43% 1.40%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.52% 1.52% 1.51% 1.50%
Ratio of Net Investment Income to Average Net Assets 0.11% 0.32% 0.70% 0.82%
Portfolio Turnover Rate 50.0% 37.0% 116.0% 39.0%
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
</TABLE>
43 of 50
<PAGE>
Latin America Fund
<TABLE>
<CAPTION>
------------------------------------------
Year Ended March 31,
------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
------ -------- ------ ------ ------
Net Asset Value, Beginning of Period $ 10.60 $ 9.46 $ 7.37 $ 5.86
-------- ------ ------ ------
Income From Investment Operations
Net Investment Income 0.21 0.10 0.05 0.10
Net Gains or (Losses) on Securities (both realized and unrealized) (5.29) 1.22 2.09 1.49
-------- ------ ------ ------
Total From Investment Operations (5.08) 1.32 2.14 1.59
-------- ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.18) (0.02) (0.05) (0.04)
Dividends in Excess of Net Investment Income 0.00 0.00 0.00 (0.04)
Distributions From Net Realized Gain on Investments 0.00 (0.16) 0.00 0.00
Distributions in Excess of Net Realized Gain on Investments (0.57) 0.00 0.00 0.00
-------- ------ ------ ------
Total Distributions (0.75) (0.18) (0.05) (0.08)
-------- ------ ------ ------
Net Asset Value, End of Period $ 4.77 $10.60 $ 9.46 $ 7.37
======== ====== ====== ======
Total Return (47.19)% 14.05% 29.09% 27.29%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $ 14.18 $88.70 $70.90 $43.16
Ratio of Net Operating Expenses to Average Net Assets 1.55% 1.50% 1.48% 1.48%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.66% 1.60% 1.56% 1.57%
Ratio of Net Investment Income/(Loss) to Average Net Assets 1.63% 0.88% 0.50% 1.12%
Portfolio Turnover Rate 29.0% 77.0% 73.0% 54.0%
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
</TABLE>
44 of 50
<PAGE>
Pacific/Asia Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ------ -------- ------- ------
Net Asset Value, Beginning of Period $ 6.52 $ 9.09 $ 9.78 $ 8.45
------ -------- ------- ------
Income From Investment Operations
Net Investment Income 0.00/2/ 0.01 0.07 0.12
Net Gains or (Losses) on Securities (both realized and unrealized) 0.29 (2.52) (0.53) 1.33
------ -------- ------- ------
Total From Investment Operations 0.29 (2.51) (0.46) 1.45
------ -------- ------- ------
Less Distributions
Dividends From Net Investment Income (0.09) (0.01) (0.07) (0.09)
Dividends in Excess of Net Investment Income (0.11) (0.05) 0.00 (0.01)
Distributions From Net Realized Gain on Investments 0.00 0.00 (0.16) (0.02)
Distributions in Excess of Net Realized Gain on Investments 0.00 0.00 0.00 0.00
------ -------- ------- ------
Total Distributions (0.20) (0.06) (0.23) (0.12)
------ -------- ------- ------
Net Asset Value, End of Period $ 6.61 $ 6.52 $ 9.09 $ 9.78
====== ======== ======= ======
Total Return 5.14% (27.56)% (4.80)% 17.22%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $28.01 $ 43.81 $ 89.95 $76.19
Ratio of Net Operating Expenses to Average Net Assets 1.55% 1.48% 1.45% 1.43%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.64% 1.57% 1.52% 1.51%
Ratio of Net Investment Income to Average Net Assets 0.01% 0.22% 0.69% 1.12%
Portfolio Turnover Rate 78.0% 52.0% 126.0% 29.0%
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
2. For comparative purposes per share amounts for the year ended March 31, 1999 are based on average shares outstanding.
</TABLE>
45 of 50
<PAGE>
Pan European Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
---- ------- ------- ------- ------
Net Asset Value, Beginning of Period $ 14.13 $ 10.94 $ 9.19 $ 8.19
------- ------- ------- ------
Income From Investment Operations
Net Investment Income (Loss) 0.00/2/ (0.01) 0.11 0.11
Net Gains or (Losses) on Securities (both Realized and unrealized) (1.26) 4.01 2.01 1.35
------- ------- ------- ------
Total From Investment Operations (1.26) 4.00 2.12 1.46
------- ------- ------- ------
Less Distributions
Dividends From Net Investment Income 0.00 0.00 (0.10) (0.10)
Dividends in Excess of Net Investment Income 0.00 0.00 0.00 0.00
Distributions From Net Realized Gain on Investments (0.48) (0.81) (0.27) (0.36)
Distributions in Excess of Net Realized Gain on Investments 0.00 0.00 0.00 0.00
------- ------- ------- ------
Total Distributions (0.48) (0.81) (0.37) (0.46)
------- ------- ------- ------
Net Asset Value, End of Period $ 12.39 $ 14.13 $ 10.94 $ 9.19
======= ======= ======= ======
Total Return (8.84)% 38.02% 23.76% 18.25%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $157.84 $207.64 $121.99 $47.92
Ratio of Net Operating Expenses to Average Net Assets 1.43% 1.43% 1.45% 1.46%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.50% 1.50% 1.52% 1.55%
Ratio of Net Investment Income/(Loss) to Average Net Assets 0.04% (0.13)% 1.23% 1.28%
Portfolio Turnover Rate 46.0% 40.0% 82.0% 42.0%
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any) by investment adviser and administrators.
2. Amount represents less than $0.01 per share.
</TABLE>
46 of 50
<PAGE>
Emerging Markets Fund
<TABLE>
<CAPTION>
Year Ended Year Ended Period ended
March 31, 1999 March 31, 1999 March 31,1998/1/
-------------- --------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.00 $ 7.00
-------- -----------
Income From Investment Operations:
Net Investment Income 0.07 0.00/2/
Net Gains or (Losses) on Securities (both realized and unrealized) (2.95) 0.00/2/
-------- -----------
Total From Investment Operations (2.88) 0.00/2/
-------- -----------
Less Distributions:
Dividends From Net Investment Income (0.08) 0.00
Distributions From Net Realized Gain on Investments 0.00 0.00
-------- -----------
Total Distributions (0.08) 0.00
-------- -----------
Net Asset Value, End of Period $ 4.04 $ 7.00
======== ===========
Total Return (41.21)% (0.14)%/3/
Ratios/Supplemental Data:
Net Assets, End of Period (in millions) $ 5.41 $ 6.54
Ratio of Net Operating Expenses to Average Net Assets 1.65% 1.85%/4,5/
Ratio of Gross Operating Expenses to Average Net Assets/6/ 2.48% 2.74%/4/
Ratio of Net Investment Income to Average Net Assets 1.93% 2.33%/4/
Portfolio Turnover Rate 73.0% 0.0%
</TABLE>
Notes:
47 of 50
<PAGE>
1. Inception date of the Fund was January 2, 1998.
2. Amount represents less than $0.01 per Share.
3. Not annualized.
4. Annualized.
5. The annualized ratio of net operating expenses to average net assets,
excluding foreign investment taxes, is 1.65%.
6. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
48 of 50
<PAGE>
Excelsior Funds, Inc.
Investment Adviser
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036
U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905
Distributor
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
More information about each Fund is available without charge through the
following:
Statement of Additional Information (SAI)
The SAI dated August 1, 2000 includes detailed information about Excelsior
Funds, Inc. The SAI is on file with the SEC and is incorporated by reference
into this prospectus. This means that the SAI, for legal purposes, is a part of
this prospectus.
Annual and Semi-Annual Reports
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, and recent market conditions and trends.
To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 446-1012 (from overseas, call (617) 557-8280)
By Mail:
Excelsior Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913
By Internet: http://www.excelsiorfunds.com
49 of 50
<PAGE>
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual
reports, as well as other information about Excelsior Funds, Inc., from the
EDGAR Database on the SEC's website ("http://www.sec.gov"). You may review and
------------------
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-942-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-6009. You may also obtain this information upon
payment of a duplicating fee, by emailing the SEC at the following address:
[email protected]. Excelsior Funds, Inc.'s Investment Company Act registration
- ------------------
number is 811-4088.
50 of 50
<PAGE>
Excelsior Funds, Inc.
Fixed Income Funds
Prospectus
August 1, 2000
Managed Income Fund
Intermediate-Term Managed Income Fund
Short-Term Government Securities Fund
Investment Adviser
United States Trust Company Of New York
U.S. Trust Company
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
Page 1 of 35
<PAGE>
Table of Contents
Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals and strategies.
This prospectus gives you important information about the Managed Income,
Intermediate-Term Managed Income and Short-Term Government Securities Funds
(each, a Fund) that you should know before investing. Please read this
prospectus and keep it for future reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:
<TABLE>
<CAPTION>
Page
<S> <C>
Managed Income Fund............................................................. XXX
Intermediate-Term Managed Income Fund........................................... XXX
Short-Term Government Securities Fund........................................... XXX
More Information About Risk..................................................... XXX
More Information About Investments.............................................. XXX
The Investment Adviser and Portfolio Managers................................... XXX
Purchasing, Selling and Exchanging Fund Shares.................................. XXX
Dividends and Distributions..................................................... XXX
Taxes........................................................................... XXX
Financial Highlights............................................................ XXX
How to Obtain More Information About
Excelsior Funds................................................................. Back Cover
</TABLE>
Page 2 of 35
<PAGE>
RISK/RETURN INFORMATION COMMON TO THE FUNDS
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal and strategies for reaching that goal. The
investment managers invest Fund assets in a way that they believe will help a
Fund achieve its goal. Still, investing in each Fund involves risk and there is
no guarantee that a Fund will achieve its goal. An investment manager's
judgments about the markets, the economy, or companies may not anticipate actual
market movements, economic conditions or company performance, and these
judgments may affect the return on your investment. In fact, no matter how good
a job an investment manager does, you could lose money on your investment in a
Fund, just as you could with other investments. A Fund share is not a bank
deposit and it is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities a Fund owns and the markets in which they trade. The
effect on a Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.
Page 3 of 35
<PAGE>
MANAGED INCOME FUND
Fund Summary
Investment Goal Current income, consistent with prudent risk
of capital
Investment Focus Investment grade fixed income securities
Share Price Volatility Medium
Principal Investment Strategy Investing in investment grade government and
corporate fixed income securities
Investor Profile Investors seeking current income, and
who are willing to accept the risks of
investing in fixed income securities of
varying maturities
Investment Objective
The Managed Income Fund seeks high current income consistent with what is
believed to be prudent risk of capital.
Investment Strategy of the Managed Income Fund
The Managed Income Fund invests primarily (at least 65% of its assets) in fixed
income securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities, and corporate issuers, including mortgage-backed securities,
rated at the time of investment in one of the three highest rating categories by
a major rating agency. The Fund also may invest up to 25% of its assets in
dollar-denominated fixed income securities of foreign issuers and may place a
portion of its assets in fixed income securities that are rated below investment
grade. These securities are sometimes called "high yield" or "junk bonds."
There is no limit on the Fund's dollar-weighted average portfolio maturity or on
the maximum maturity of a particular security. The Adviser manages the Fund's
average portfolio maturity in light of current market and economic conditions to
provide a competitive current yield and reasonable principal volatility. In
selecting particular investments, the Adviser looks for securities that offer
relative value, based on its assessment of real interest rates and the yield
curve, and that have the potential for moderate price appreciation.
Principal Risks of Investing in the Managed Income Fund
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise, and the volatility of lower rated securities is even greater than
that of higher rated securities.
Page 4 of 35
<PAGE>
The Fund's U.S. government securities are not guaranteed against price movements
due to changing interest rates. Obligations issued by some U.S. government
agencies are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
The Fund also may be subject to risks particular to its investments in foreign
fixed income securities. These risks are discussed in greater detail in the
section entitled "More Information About Risk."
Junk bonds are considered speculative, involve greater risks of default or
down-grade and are more volatile than investment grade securities. Junk bonds
involve additional risks which are discussed in greater detail in the section
entitled "More Information About Risk."
The Fund is also subject to the risk that long-term fixed income securities may
underperform other segments of the fixed income market or the fixed income
markets as a whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<S> <C>
1990 8.61%
1991 16.66%
1992 5.82%
1993 12.66%
1994 (5.53)%
1995 22.44%
1996 0.57%
1997 9.79%
1998 8.59%
1999 X.XX%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was X.XX%.
Page 5 of 35
<PAGE>
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Lehman Brothers Government/Corp Bond
Index.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed Income Fund X.XX% X.XX% X.XX%
Lehman Brothers Govt/Corp Bond Index X.XX% X.XX% X.XX%
</TABLE>
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
Net Annual Fund Operating Expenses X.XX%
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse
expenses in order to keep total operating expenses from exceeding
[X.XX%], for a period of one year from the date of this prospectus. For
more information about these fees, see "Investment Adviser and Portfolio
Managers."
Example
Page 6 of 35
<PAGE>
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$XXX $XXX $XXX $XXX
</TABLE>
Page 7 of 35
<PAGE>
INTERMEDIATE-TERM MANAGED INCOME FUND
Fund Summary
Investment Goal Current income, consistent with relative
stability of principal
Investment Focus Investment grade fixed income securities
Share Price Volatility Medium
Principal Investment Strategy Investing in investment grade government and
corporate fixed income securities
Investor Profile Investors seeking current income, and who are
willing to accept the risks of investing in
fixed income securities
Investment Objective
The Intermediate-Term Managed Income Fund seeks as high a level of current
interest income as is consistent with relative stability of principal.
Investment Strategy of the Intermediate-Term Managed Income Fund
The Intermediate-Term Managed Income Fund invests primarily (at least 65% of its
assets) in fixed income securities issued or guaranteed by the U.S. government,
its agencies and instrumentalities, and corporate issuers, including mortgage-
backed securities, rated at the time of investment in one of the three highest
rating categories by a major rating agency. The Fund also may invest up to 25%
of its assets in dollar-denominated fixed income securities of foreign issuers
and may place a portion of its assets in fixed income securities that are rated
below investment grade. These securities are sometimes called "high yield" or
"junk" bonds.
The Fund maintains a dollar-weighted average portfolio maturity of 3 to 10
years. The Adviser manages the Fund's average portfolio maturity in light of
current market and economic conditions to provide a competitive current yield
with reasonable risk of price volatility. In selecting particular investments,
the Adviser looks for securities that offer relative value, based on its
assessment of real interest rates and the yield curve. The fixed income
securities held by the Fund also may have the potential for moderate price
appreciation. There is no limit on the maximum maturity for a particular
security.
Principal Risks of Investing in the Intermediate-Term Managed Income Fund
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if
Page 8 of 35
<PAGE>
interest rates rise, and the volatility of lower rated securities is even
greater than that of higher rated securities.
The Fund's U.S. government securities are not guaranteed against price movements
due to changing interest rates. Obligations issued by some U.S. government
agencies are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
The Fund also may be subject to risks particular to its investments in foreign
fixed income securities. These risks are discussed in greater detail in the
section entitled "More Information About Risk."
Junk bonds are considered speculative, involve greater risks of default or down-
grade and are more volatile than investment grade securities. Junk bonds involve
additional risks which are discussed in greater detail in the section entitled
"More Information About Risk."
The Fund is also subject to the risk that intermediate-term fixed income
securities may underperform other segments of the fixed income market or the
fixed income markets as a whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
<TABLE>
<CAPTION>
<S> <C>
1993 8.44%
1994 (3.71)%
1995 19.23%
1996 1.92%
1997 8.49%
1998 8.46%
1999 X.XX%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
</TABLE>
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
Page 9 of 35
<PAGE>
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Lehman Brothers Intermediate Govt/Corp
Bond Index.
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Managed Income Fund X.XX% X.XX% X.XX%*
Lehman Brothers Intermediate Govt/Corp Bond Index X.XX% X.XX% X.XX%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Total Annual Fund Operating Expenses X.XX%
-----
Fee Waivers and Expense Reimbursements X.XX%
-----
Net Annual Fund Operating Expenses X.XX%
-----
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses
in order to keep total operating expenses from exceeding [X.XX%], for a
period of one year from the date of this prospectus. For more information
about these fees, see "Investment Adviser and Portfolio Managers."
Page 10 of 35
<PAGE>
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$XXX $XXX $XXX $XXX
</TABLE>
Page 11 of 35
<PAGE>
Short-Term Government Securities Fund
Fund Summary
Investment Goal Current income, consistent with stability of
principal
Investment Focus Short-term fixed income securities issued or
guaranteed by the U.S. government, its
agencies and instrumentalities
Share Price Volatility Low
Principal Investment Strategy Investing in U.S. government securities,
while maintaining a dollar-weighted average
maturity of 1 to 3 years
Investor Profile Investors seeking to preserve capital and
earn current income
Investment Objective
The Short-Term Government Securities Fund seeks a high level of current income
consistent with stability of principal.
Investment Strategy of the Short-Term Government Securities Fund
The Short-Term Government Securities Fund invests primarily (at least 65% of its
assets) in fixed income securities issued or guaranteed by the U.S. government,
its agencies and instrumentalities, including mortgage-backed securities.
Interest payments on these securities generally will be exempt from state and
local taxes.
The Fund generally maintains a dollar-weighted average portfolio maturity of 1
to 3 years. The Adviser manages the Fund's average portfolio maturity in light
of current market and economic conditions to provide a competitive current yield
with relative stability of principal. In selecting particular investments, the
Adviser looks for securities that offer relative value, based on its assessment
of real interest rates and the yield curve. There is no limit on the maximum
maturity for a particular security.
Principal Risks of Investing in the Short-Term Government Securities Fund
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise, and the volatility of lower rated securities is even greater than
that of higher rated securities.
Page 12 of 35
<PAGE>
The Fund's U.S. government securities are not guaranteed against price movements
due to changing interest rates. Obligations issued by some U.S. government
agencies are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
The Fund is also subject to the risk that short-term government securities may
underperform other segments of the fixed income market or the fixed income
markets as a whole.
Performance Information
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the Fund's performance from year to year.
1993 4.32%
1994 1.07%
1995 10.25%
1996 3.97%
1997 5.87%
1998 6.30%
1999 X.XX%
BEST QUARTER WORST QUARTER
X.XX% X.XX%
(XX/XX/XX) (XX/XX/XX)
The Fund's performance for the six month period ending June 30, 2000 was
X.XX%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Lehman Brothers 1-3 Year Government Bond
Index.
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Government Securities Fund X.XX% X.XX% X.XX%*
Lehman Brothers 1-3 Year Government Bond Index X.XX% X.XX% X.XX%*
</TABLE>
* Since December 31, 1992
What is an Index?
Page 13 of 35
<PAGE>
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 14 of 35
<PAGE>
Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)*
Management Fees X.XX%
Other Expenses
Administrative Servicing Fee X.XX%
Other Operating Expenses X.XX%
Total Other Expenses X.XX%
- -------------------------------------------------------------------------
Total Annual Fund Operating Expenses X.XX%
Fee Waivers and Expense Reimbursements X.XX%
- -------------------------------------------------------------------------
Net Annual Fund Operating Expenses X.XX%
* The Adviser has contractually agreed to waive fees and reimburse
expenses in order to keep total operating expenses from exceeding
[X.XX%], for a period of one year from the date of this prospectus. For
more information about these fees, see "Investment Adviser and Portfolio
Managers."
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period.
The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs and returns might be different, your
approximate costs of investing $10,000 in the Fund would be:
1 Year 3 Years 5 Years 10 Years
$XXX $XXX $XXX $XXX
Page 15 of 35
<PAGE>
More Information About Risk
Fixed Income Risk - The market value of fixed income All Funds
investments change in response to interest rate changes and
other factors. During periods of falling interest rates,
the values of outstanding fixed income securities generally
rise. Moreover, while securities with longer maturities
tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations
as a result of changes in interest rates. As the average
maturity or duration of a security lengthens, the risk that
the price of such security will become more volatile
increases. Duration approximates the price sensitivity of a
security to changes in interest rates. In contrast to
maturity which measures only time until final payment,
duration combines consideration of yield, interest payments,
final maturity and call features.
Call Risk - During periods of falling interest All Funds
rates, certain debt obligations with high interest
rates may be prepaid (or "called") by the issuer
prior to maturity. This may cause a Fund's average
weighted maturity to fluctuate, and may require a
Fund to invest the resulting proceeds at lower
interest rates.
Credit Risk - The possibility that an issuer will All Funds
be unable to make timely payments of either principal
or interest.
Event Risk - Securities may suffer declines in All Funds
credit quality and market value due to issuer
restructurings or other factors. This risk should
be reduced because of a Fund's multiple holdings.
Page 16 of 35
<PAGE>
High-Yield, Lower Rated Securities - "Junk bonds" Intermediate-Term Managed
are subject to additional risks associated Income Fund Managed Income
with investing in high-yield securities, Fund
including:
Greater risk of default or price declines due to
changes in the issuer's creditworthiness. Junk
bonds are subject to the risk that the issuer may
not be able to pay interest or dividends and
ultimately to repay principal upon maturity.
Discontinuation of these payments could
substantially adversely affect the market value of
the security.
A thinner and less active market, which may
increase price volatility and limit the ability of
a Fund to sell these securities at their carrying
values.
Prices for high-yield, lower rated securities may
be affected by investor perception of issuer
credit quality and the outlook for economic
growth, such that prices may move independently of
interest rates and the overall bond market.
Issuers of junk bonds may be more susceptible than
other issuers to economic downturns.
Mortgage-Backed Securities - Mortgage-backed All Funds
securities are fixed income securities
representing an interest in a pool of underlying
mortgage loans. They are sensitive to changes in
interest rates, but may respond to these changes
differently from other fixed income securities due
to the possibility of prepayment of the underlying
mortgage loans. As a
Page 17 of 35
<PAGE>
result, it may not be possible to determine in
advance the actual maturity date or average life
of a mortgage-backed security. Rising interest
rates tend to discourage refinancings, with the
result that the average life and volatility of the
security will increase, exacerbating its decrease
in market price. When interest rates fall,
however, mortgage-backed securities may not gain
as much in market value because of the expectation
of additional mortgage prepayments that must be
reinvested at lower interest rates. Prepayment
risk may make it difficult to calculate the
average maturity of a portfolio of mortgage-backed
securities and, therefore, to assess the
volatility risk of that portfolio.
Page 18 of 35
<PAGE>
Page 19 of 35
<PAGE>
Foreign Security Risks-- Investments in securities Managed Income Fund
of foreign companies or governments can be more Intermediate-Term Managed
volatile than investments in U.S. companies or Income Fund
governments. Diplomatic, political, or economic
developments, including nationalization or
appropriation, could affect investments in foreign
countries. Foreign securities markets generally
have less trading volume and less liquidity than
U.S. markets. In addition, the value of securities
denominated in foreign currencies, and of
dividends from such securities, can change
significantly when foreign currencies strengthen
or weaken relative to the U.S. dollar. Foreign
companies or governments generally are not subject
to uniform accounting, auditing, and financial
reporting standards comparable to those applicable
to domestic U.S. companies or governments.
Transaction costs are generally higher than those
in the U.S. and expenses for custodial
arrangements of foreign securities may be somewhat
greater than typical expenses for custodial
arrangements of similar U.S. securities. Some
foreign governments levy withholding taxes against
dividend and interest income. Although in some
countries a portion of these taxes is recoverable,
the non-recovered portion will reduce the income
received from the securities comprising the
portfolio.
Page 20 of 35
<PAGE>
More Information About Fund Investments
In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During adverse economic, market or other
conditions, each Fund may take temporary defensive positions such as investing
up to 100% of its assets in investments that would not ordinarily be consistent
with a Fund's objective. The Fund may not achieve its objective when so
invested. A Fund will do so only if the Adviser believes that the risk of loss
outweighs the opportunity for capital gains or higher income. Of course, a Fund
cannot guarantee that it will achieve its investment goal.
Investment Adviser
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.
On January 13, 2000, The Charles Schwab Corporation ("Schwab") and U.S. Trust
Corporation announced that they had signed an agreement to merge (the "Merger").
The Merger is subject to the approval of U.S. Trust Corporation shareholders and
is expected to close in the second quarter of 2000. Under the terms of the
agreement, U.S. Trust Corporation will retain its name and continue to provide
investment management, fiduciary, financial planning and private banking
services. As a result, U.S. Trust will continue to serve as the investment
adviser to the Funds. The Merger, however, will represent a change of ownership
of the Adviser's parent corporation and, as such, will have the effect under the
Investment Company Act of 1940 of terminating the existing advisory agreements
between Excelsior Funds, Inc. and the Adviser.
As a consequence of the Merger and in order to facilitate the investment
management of the Funds, the Board of Directors of Excelsior Funds, Inc.
approved a new advisory agreement with the Adviser on March 3, 2000. The new
advisory agreement was subsequently approved by a vote of shareholders of the
Funds at a meeting held on May 3, 2000. The new advisory agreement will become
effective on the date of the Merger.
U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. On December 31, 1999,
U.S. Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W. 47th
Street, New York, NY 10036. U.S. Trust Company has its principal offices at 225
High Ridge Road, East Building, Stamford, CT 06905.
Page 21 of 35
<PAGE>
The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.
The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.
For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:
Short-Term Government Securities Fund [0.21%]
Intermediate-Term Managed Income Fund [0.28%]
Page 22 of 35
<PAGE>
Managed Income Fund [0.62%]
Portfolio Managers
Frank A. Salem has served as the Intermediate-Term Managed Income Fund's
portfolio manager since August 1998. Beginning August, 1999, Mr. Salem also
serves as the Short-Term Government Securities Fund's portfolio manager. Mr.
Salem is a Senior Vice President in U.S. Trust's Fixed-Income division and has
been with U.S. Trust since 1998. Prior to joining U.S. Trust, Mr. Salem was a
Director and Portfolio Manager in the Fixed-Income Department of Mackay Shields
in New York. Mr. Salem is primarily responsible for the day to day management of
the Intermediate-Term Managed Income Fund's portfolio. Research, analyses, trade
execution and other facilities provided by U.S. Trust and other personnel also
play a significant role in portfolio management and performance.
Alexander R. Powers has served as the Managed Income Fund's portfolio manager
since August 1997. Mr. Powers, Managing Director of Taxable Fixed Income
Investments, has been with U.S. Trust since 1996. From 1988 to 1996, Mr. Powers
was a Manager of Fixed Income Instruments with Chase Asset Management. Mr.
Powers is primarily responsible for the day to day management of the Managed
Income Fund's portfolio. Research, analyses, trade execution and other
facilities provided by U.S. Trust and other personnel also play a significant
role in portfolio management and performance.
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange shares of the Funds.
How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
. Telephone
. Wire, or
. Automatic Investment Program
To purchase shares directly from us, complete and send in the enclosed
application to Excelsior Funds, c/o Chase Global Funds Services Company, P.O.
Box 2798, Boston, MA 02208-2798. Unless you arrange to pay by wire or through
the automatic investment program, write your check, payable in U.S. dollars, to
"Excelsior Funds" and include the name of the appropriate Fund(s) on the check.
A Fund cannot accept third-party checks, credit cards, credit card checks or
cash. To purchase shares by wire, please call us for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve System
to:
The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account Number 9102732915
Page 23 of 35
<PAGE>
For Further Credit To:
Excelsior Funds
[Wire Control Number]
[Excelsior Funds Account Registration
(including account number)]
Investors making initial investments by wire must promptly complete the enclosed
application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above
instructions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your broker or institution may charge a fee for its services, in addition to the
fees charged by the Fund. You will also generally have to address your
correspondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for dealers,
which will be paid for by the distributor out of its own assets and not out of
the assets of the Funds. Under any such program, the distributor may provide
incentives, in the form of cash or other compensation, including merchandise,
airline vouchers, trips and vacation packages, to dealers selling shares of a
Fund. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms.
General Information
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). A Fund may reject any
purchase request if it is determined that accepting the request would not be in
the best interests of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good order.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received.
Each Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So, for
you to receive the current Business Day's NAV, a Fund must receive your purchase
request in good order before 4:00 p.m., Eastern time.
Page 24 of 35
<PAGE>
How We Calculate NAV
NAV for one Fund share is the value of that share's portion of all of the net
assets of the Fund.
In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser thinks that they are
unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Directors. Fixed income investments with remaining
maturities of 60 days or less generally are valued at their amortized cost,
which approximates their market value.
Minimum Purchases
To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in any Fund.
Your subsequent investments in any Fund must be made in amounts of at least $50.
A Fund may accept investments of smaller amounts at its discretion.
Automatic Investment Program
If you have a checking, money market or NOW account with a bank, you may
purchase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.
With a $50 minimum initial investment, you may begin regularly scheduled
investments once per month, on either the first or fifteenth day, or twice per
month, on both days.
How to Sell Your Fund Shares
You may sell shares directly by:
. Mail
. Telephone, or
. Systematic Withdrawal Plan
Holders of Fund shares may sell (sometimes called "redeem") shares by following
the procedures established when they opened their account or accounts. If you
have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).
You may sell your shares by sending a written request for redemption to:
Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Please be sure to indicate the number of shares to be sold, identify your
account number and sign the request.
Page 25 of 35
<PAGE>
If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares on any
Business Day by contacting a Fund directly by telephone at (800) 446-1012 (from
overseas, call (617) 557-8280). The minimum amount for telephone redemptions is
$500. We may reject a telephone redemption request if we deem it advisable to do
so.
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or
institution may charge a fee for its services, in addition to the fees charged
by the Fund.
If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).
The sale price of each share will be the next NAV determined after the Fund
receives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic
withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual
or annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.
Receiving Your Money
Normally, we will send your sale proceeds within five Business Days after we
receive your request in good order. Your proceeds can be wired to your bank
account (if more than $500) or sent to you by check. If you recently purchased
your shares by check, redemption proceeds may not be available until your check
has cleared (which may take up to 15 days from your date of purchase.
Redemptions in Kind
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would probably have to pay
transaction costs to sell the securities distributed to you, as well as taxes on
any capital gains from the sale as with any redemption.
Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be
required to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
Page 26 of 35
<PAGE>
Suspension of Your Right to Sell Your Shares
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in our Statement of Additional Information.
How to Exchange Your Shares
You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for shares of any
portfolio of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year, and we
may reject any exchange request. Shares can be exchanged directly by mail, or by
telephone if you previously selected the telephone exchange option on the
account application.
You may also exchange shares through your financial institution. Exchange
requests must be for an amount of at least $500.
If you recently purchased shares by check, you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your date
of purchase). This exchange privilege may be changed or canceled at any time
upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.
Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards and
procedures to confirm the identity of callers and the authenticity of
instructions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.
Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund shares.
These intermediaries may authorize other organizations to accept purchase,
redemption and exchange requests for Fund shares. These requests are normally
executed at the NAV next determined after the intermediary receives the request
in good order. Authorized intermediaries are responsible for transmitting
requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay a shareholder servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing
Page 27 of 35
<PAGE>
periodic account statements. The shareholder servicing fee may be up to 0.40% of
the average daily net asset value of Fund shares held by clients of a
shareholder organization.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying
accumulated dividends monthly.
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
Dividends and distributions for shares held of record by U.S. Trust and its
affiliates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.
Taxes
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital (the excess of long-term
capital gain over short-term capital loss). Distributions attributable to the
net capital gain of a Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions will
generally be taxable as ordinary income. You will be subject to income tax on
Fund distributions regardless whether they are paid in cash or reinvested in
additional shares. You will be notified annually of the tax status of
distributions to you.
You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you received for
them. To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
Page 28 of 35
<PAGE>
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or localities
within the state.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. Shareholders who are nonresident
aliens, foreign trusts or estates, or foreign corporations or partnerships, may
be subject to different United States federal income tax treatment. You should
consult your tax adviser for further information regarding federal, state, local
and/or foreign tax consequences relevant to your specific situation.
More information about taxes is in the Statement of Additional Information.
Page 29 of 35
<PAGE>
Financial Highlights
The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund's financial
performance for the past five years, or, if shorter, the period of the Fund's
operations. Some of this information reflects financial information for a single
Fund share. The total returns in the table represent the rate that you would
have earned (or lost) on an investment in a Fund, assuming you reinvested all of
your dividends and distributions. This information has been audited by ________,
independent public accountants. Their report, along with each Fund's financial
statements, are incorporated by reference into our Statement of Additional
Information. You can obtain the annual report, which contains more performance
information, at no charge by calling (800) 446-1012 (from overseas, call (617)
557-8280).
Page 30 of 35
<PAGE>
Managed Income Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.17 $ 8.60 $ 8.84 $ 8.39 $ 8.57
------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income 0.46 0.49 0.51 0.55 0.51
Net Gains or (Losses) on Securities (both realized and unrealized) 0.08 0.58 (0.24) 0.44 (0.18)
------- ------- ------- ------- -------
Total From Investment Operations 0.54 1.07 0.27 0.99 0.33
------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.46) (0.49) (0.51) (0.54) (0.51)
Dividends From Net Realized Gain on Investments (0.26) (0.01) 0.00 0.00 0.00
Distributions in Excess of Net Realized Gain on Investments 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- -------
Total Distributions (0.72) (0.50) (0.51) (0.54) (0.51)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 8.99 $ 9.17 $ 8.60 $ 8.84 $ 8.39
======= ======= ======= ======= =======
Total Return 5.95% 12.79% 3.17% 11.86% 4.06%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $215.77 $196.10 $185.90 $ 88.90 $ 86.02
Ratio of Net Operating Expenses to Average Net Assets 0.90% 0.90% 0.90% 0.96% 1.00%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 1.03% 1.02% 1.04% 1.12% 1.12%
Ratio of Net Investment Income to Average Net Assets 4.96% 5.51% 5.90% 6.09% 6.09%
Portfolio Turnover Rate 268.0% 538.0% 238.0% 165.0% 492.0%
</TABLE>
________________
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 31 of 35
<PAGE>
Intermediate-Term Managed Income Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.23 $ 6.87 $ 7.06 $ 6.75 $ 6.83
------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income 0.39 0.41 0.41 0.43 0.39
Net Gains or (Losses) on Securities (both realized and unrealized) 0.04 0.36 (0.19) 0.31 (0.07)
------- ------- ------- ------- -------
Total From Investment Operations 0.43 0.77 0.22 0.74 0.32
------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment Income (0.39) (0.41) (0.41) (0.43) (0.39)
Dividends From Net Realized Gain on Investments (0.13) 0.00 0.00 0.00 0.00
Distributions in Excess of Net Realized Gain on Investments (0.01) 0.00 0.00 0.00 (0.01)
------- ------- ------- ------- -------
Total Distributions (0.53) (0.41) (0.41) (0.43) (0.40)
------- ------- ------- ------- -------
Net Asset Value, End of Period $ 7.13 $ 7.23 $ 6.87 $ 7.06 $ 6.75
======= ======= ======= ======= =======
Total Return 6.02% 11.37% 3.25% 11.13% 4.95%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $127.74 $ 94.94 $ 78.44 $ 68.64 $ 47.93
Ratio of Net Operating Expenses to Average Net Assets 0.60% 0.61% 0.63% 0.64% 0.66%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.67% 0.66% 0.68% 0.68% 0.68%
Ratio of Net Investment Income to Average Net Assets 5.29% 5.68% 5.91% 6.06% 5.91%
Portfolio Turnover Rate 229.0% 86.0% 129.0% 129.0% 682.0%
</TABLE>
_________
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 32 of 35
<PAGE>
Short-Term Government Securities Fund
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.00 $ 6.93 $ 6.98 $ 6.89 $ 6.93
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income 0.34 0.37 0.38 0.40 0.33
Net Gains or (Losses) on Securities (both realized and 0.04 0.07 (0.06) 0.09 (0.04)
------ ------ ------ ------ ------
unrealized)
Total From Investment Operations 0.38 0.44 0.32 0.49 0.29
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income (0.34) (0.37) (0.37) (0.40) (0.33)
Dividends From Net Realized Gain on Investments 0.00 0.00 0.00 0.00 0.00
Distributions in Excess of Net Realized Gain on 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Investments
Total Distributions (0.34) (0.37) (0.37) (0.40) (0.33)
------ ------ ------ ------ ------
Net Asset Value, End of Period $ 7.04 $ 7.00 $ 6.93 $ 6.98 $ 6.89
====== ====== ====== ====== ======
Total Return 5.54% 6.47% 4.77% 7.27% 4.30%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $52.59 $32.55 $30.80 $25.07 $25.22
Ratio of Net Operating Expenses to Average Net Assets 0.58% 0.62% 0.61% 0.61% 0.61%
Ratio of Gross Operating Expenses to Average Net Assets/1/ 0.67% 0.69% 0.70% 0.80% 0.67%
Ratio of Net Investment Income to Average Net Assets 4.79% 5.28% 5.42% 5.72% 4.80%
Portfolio Turnover Rate 114.0% 35.0% 82.0% 77.0% 198.0%
</TABLE>
______________
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
Page 33 of 35
<PAGE>
Excelsior Funds, Inc.
Investment Adviser
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036
U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905
Distributor
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
More information about each Fund is available without charge through the
following:
Statement of Additional Information (SAI)
The SAI dated August 1, 2000 includes detailed information about Excelsior
Funds, Inc. The SAI is on file with the SEC and is incorporated by reference
into this prospectus. This means that the SAI, for legal purposes, is a part of
this prospectus.
Annual and Semi-Annual Reports
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, recent market conditions and trends.
To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 446-1012 (from overseas, call (617) 557-8280)
By Mail: Excelsior Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913
By Internet: http://www.excelsiorfunds.com
Page 34 of 35
<PAGE>
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about Excelsior Funds, Inc., from the SEC's EDGAR
Database on the website ("http://www.sec.gov"). You may review and copy
------------------
documents at the SEC Public Reference Room in Washington, DC (for information on
the operation of the Public Reference Room, call 202-942-8090). You may request
documents by mail from the SEC, upon payment of a duplicating fee, by writing
to: Securities and Exchange Commission, Public Reference Section, Washington, DC
20549-0102. You may also obtain this information upon payment of a duplicating
fee, by emailing the SEC at the following address: [email protected]. Excelsior
------------------
Funds, Inc.'s Investment Company Act registration number is 811-4088.
Page 35 of 35
<PAGE>
EXCELSIOR FUNDS, INC.
Money Fund
Government Money Fund
Treasury Money Fund
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Tax-Exempt Money Fund
New York Tax-Exempt Money Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the current prospectus for the Money,
Government Money and Treasury Money Funds of Excelsior Funds, Inc. and the
Tax-Exempt Money and New York Tax-Exempt Money Funds of Excelsior Tax-Exempt
Funds, Inc. (individually, a "Fund" and collectively, the "Funds") dated
________, 2000 (the "Prospectus"). A copy of the Prospectus may be obtained by
writing Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc. c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by
calling (800) 446-1012. Capitalized terms not otherwise defined have the same
meaning as in the Prospectus.
The audited financial statements and related report of
_________________________, independent auditors, contained in the annual report
to the Funds' shareholders for the fiscal year ended March 31, _____ are
incorporated herein by reference in the section entitled "Financial Statements."
No other parts of the annual report are incorporated herein by reference.
Copies of the annual report may be obtained upon request and without charge by
calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY............................................... 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS.............................. 1
Additional Investment Policies...................................... 1
Additional Information On Portfolio Instruments..................... 4
Special Considerations Relating To New York Municipal Securities.... 13
Investment Limitations.............................................. 24
NET ASSET VALUE AND NET INCOME........................................... 29
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 29
Distributor......................................................... 29
Purchase Of Shares.................................................. 30
Redemption Procedures............................................... 31
Other Redemption Information........................................ 32
INVESTOR PROGRAMS........................................................ 33
Systematic Withdrawal Plan.......................................... 33
Exchange Privilege.................................................. 34
Retirement Plans.................................................... 35
Automatic Investment Program........................................ 35
Additional Information.............................................. 35
DESCRIPTION OF CAPITAL STOCK............................................. 36
MANAGEMENT OF THE FUNDS.................................................. 37
Directors And Officers.............................................. 37
Investment Advisory And Administration Agreements................... 42
Shareholder Organizations........................................... 45
Expenses............................................................ 47
Custodian And Transfer Agent........................................ 48
PORTFOLIO TRANSACTIONS................................................... 49
INDEPENDENT AUDITORS..................................................... 50
COUNSEL.................................................................. 50
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 50
Generally........................................................... 50
YIELD INFORMATION........................................................ 52
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
CODE OF ETHICS.................................................... 54
MISCELLANEOUS..................................................... 54
FINANCIAL STATEMENTS.............................................. 55
APPENDIX A........................................................ A-1
</TABLE>
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Funds, Inc. ("Excelsior Fund") and Excelsior Tax-Exempt
Funds, Inc. ("Excelsior Tax-Exempt Fund" and collectively with Excelsior Fund,
the "Companies") are open-end, management investment companies. The Money,
Government Money and Treasury Money Funds are separate series of Excelsior Fund.
The Tax-Exempt Money and New York Tax-Exempt Money Funds are separate series of
Excelsior Tax-Exempt Fund. The Money, Government Money, Treasury Money and Tax-
Exempt Money Funds are classified as diversified under the Investment Company
Act of 1940, as amended (the "1940 Act"). The New York Tax-Exempt Money Fund is
classified as non-diversified under the 1940 Act. Excelsior Fund and Excelsior
Tax-Exempt Fund were organized as Maryland corporations on August 2, 1984 and
August 8, 1984, respectively. Prior to December 28, 1995, Excelsior Fund and
Excelsior Tax-Exempt Fund were known as "UST Master Funds, Inc." and "UST Master
Tax-Exempt Funds, Inc.," respectively. This Statement of Additional Information
pertains to the Shares ("Retail Shares") of all the Funds and the Institutional
Shares of the Money and Government Money Funds (collectively with the Retail
Shares, the "Shares").
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------
The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the Money, Government Money and
Treasury Money Funds (collectively, the "Taxable Funds") and the Tax-Exempt
Money Fund may not be changed without the vote of the holders of a majority of
its outstanding Shares (as defined below). The investment objective of the New
York Tax-Exempt Money Fund may be changed without shareholder approval. Except
as expressly noted below, each Fund's investment policies may be changed without
shareholder approval.
As discussed below under "Net Asset Value and Net Income," each Fund
uses the amortized cost method to value securities in its portfolio. As such,
each Fund is required to comply with Rule 2a-7 under the 1940 Act. Under Rule
2a-7, with respect to 100% of each of the Money, Government Money, Treasury
Money and Tax-Exempt Money Funds' total assets, and 75% of the New York Tax-
Exempt Money Fund's total assets, a Fund may not invest more than 5% of its
assets, measured at the time of purchase, in the securities of any one issuer
other than U.S. government securities, repurchase agreements collateralized by
such securities and securities subject to certain guarantees. The New York Tax-
Exempt Money Fund's compliance with the diversification provisions of Rule 2a-7
is deemed to be compliance with the diversification standards of the 1940 Act.
Additional Investment Policies
- ------------------------------
The Funds may only invest in: (i) securities in the two highest
short-term rating categories of a nationally recognized statistical rating
organization ("NRSRO"), provided that if a security is rated by more than one
NRSRO, at least two NRSROs must rate the security in one of the two highest
short-term rating categories; (ii) unrated securities determined to be of
-1-
<PAGE>
comparable quality at the time of purchase; (iii) certain money market fund
shares; and (iv) U.S. government securities (collectively, "Eligible
Securities"). The rating symbols of the NRSROs which the Funds may use are
described in the Appendix attached hereto.
Treasury Money Fund
- -------------------
Under normal market conditions, the Treasury Money Fund will invest at
least 65% of its total assets in direct U.S. Treasury obligations, such as
Treasury bills and notes. The Fund may also from time to time invest in
obligations issued or guaranteed as to principal and interest by certain
agencies or instrumentalities of the U.S. government, such as the Farm Credit
System Financial Assistance Corporation, Federal Financing Bank, General
Services Administration, Federal Home Loan Banks, Farm Credit System and the
Tennessee Valley Authority. Income on direct investments in U.S. Treasury
securities and obligations of the aforementioned agencies and instrumentalities
is generally not subject to state and local income taxes by reason of federal
law. In addition, the Fund's dividends from income that is attributable to such
investments will also be exempt in most states from state and local income
taxes. Shareholders in a particular state should determine through consultation
with their own tax advisors whether and to what extent dividends payable by the
Treasury Money Fund from its investments will be considered by the state to have
retained exempt status, and whether the Fund's capital gain and other income, if
any, when distributed will be subject to the state's income tax.
Tax-Exempt Money and New York Tax-Exempt Money Funds (the "Tax-Exempt Funds")
- ---------------------------------------------------------------------------
The Tax-Exempt Money Fund will invest substantially all of its assets
in high-quality debt obligations determined by the Adviser to present minimal
credit risks. Such obligations will be issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their respective authorities, agencies, instrumentalities and political
subdivisions, the interest on which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax ("Municipal Securities"). As a matter of
fundamental policy, except during temporary defensive periods, the Fund will
maintain at least 80% of its assets in tax-exempt obligations. (This policy may
not be changed with respect to the Fund without the vote of the holders of a
majority of its outstanding Shares.) The Tax-Exempt Money Fund also may invest
in certain tax-exempt derivative instruments, such as floating rate trust
receipts.
Under normal market conditions, at least 80% of the New York Tax-
Exempt Money Fund's net assets will be invested in Municipal Securities which
are determined by the Adviser to present minimal credit risks. The Fund may
also invest in tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests.
Dividends paid by the Fund that are derived from interest on obligations that is
exempt from taxation under the Constitution or statutes of New York ("New York
Municipal Securities") are exempt from regular federal, New York State and New
York City personal income tax. New York Municipal Securities include municipal
securities issued by the State of New York and its political sub-divisions, as
well as certain other governmental issuers such as the Commonwealth of Puerto
Rico. Dividends derived from interest on Municipal Securities other than New
York Municipal Securities are exempt from federal income tax but may be
-2-
<PAGE>
subject to New York State and New York City personal income tax (see "Additional
Information Concerning Taxes" below). The Fund expects that under normal market
conditions, at least 65% of its total assets will be invested in New York
Municipal Securities.
The New York Tax-Exempt Money Fund is concentrated in securities
issued by New York State or entities within New York State and therefore
investment in the Fund may be riskier than an investment in other types of money
market funds. The Fund's ability to achieve its investment objective is
dependent upon the ability of the issuers of New York Municipal Securities to
meet their continuing obligations for the payment of principal and interest.
New York State and New York City face long-term economic problems that could
seriously affect their ability and that of other issuers of New York Municipal
Securities to meet their financial obligations.
Certain substantial issuers of New York Municipal Securities
(including issuers whose obligations may be acquired by the Fund) have
experienced serious financial difficulties in recent years. These difficulties
have at times jeopardized the credit standing and impaired the borrowing
abilities of all New York issuers and have generally contributed to higher
interest costs for their borrowings and fewer markets for their outstanding debt
obligations. Although several different issues of Municipal Securities of New
York State and its agencies and instrumentalities and of New York City have been
downgraded by Standard & Poor's Ratings Services ("S&P") and Moody's Investors
Service, Inc. ("Moody's") in recent years, S&P and Moody's have recently placed
the debt obligations of New York State and New York City on CreditWatch with
positive implications and upgraded the debt obligations of New York City.
Strong demand for New York Municipal Securities has also at times had the effect
of permitting New York Municipal Securities to be issued with yields relatively
lower, and after issuance, to trade in the market at prices relatively higher,
than comparably rated municipal obligations issued by other jurisdictions. A
recurrence of the financial difficulties previously experienced by certain
issuers of New York Municipal Securities could result in defaults or declines in
the market values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal Securities. Although as of
the date of this Statement of Additional Information, no issuers of New York
Municipal Securities are in default with respect to the payment of their
municipal obligations, the occurrence of any such default could affect adversely
the market values and marketability of all New York Municipal Securities and,
consequently, the net asset value of the New York Tax-Exempt Money Fund's
portfolio. Other considerations affecting the Fund's investments in New York
Municipal Securities are summarized below under "Special Considerations Relating
to New York Municipal Securities."
From time to time on a temporary defensive basis due to market
conditions, the Tax-Exempt Funds may hold uninvested cash reserves or invest in
taxable obligations in such proportions as, in the opinion of the Adviser,
prevailing market or economic conditions may warrant. Uninvested cash reserves
will not earn income. Taxable obligations in which the Tax-Exempt Funds may
invest include: (i) obligations of the U.S. Treasury; (ii) obligations of
agencies and instrumentalities of the U.S. government; (iii) money market
instruments such as certificates of deposit, commercial paper, and bankers'
acceptances; (iv) repurchase agreements collateralized by U.S. government
obligations or other money market instruments; and (v) securities issued by
other investment companies that invest in high-quality, short-term securities.
-3-
<PAGE>
The Tax-Exempt Funds may also invest from time to time in "private
activity bonds" (see "Municipal Securities" below), the interest on which is
treated as a specific tax preference item under the federal alternative minimum
tax. Investments in such securities, however, will not exceed under normal
market conditions 20% of a Fund's net assets when added together with any
taxable investments by the Fund.
Each Tax-Exempt Fund may invest more than 25% of its assets in
Municipal Securities the interest on which is paid solely from revenues on
similar projects if such investment is deemed necessary or appropriate by the
Adviser. To the extent that a Fund's assets are concentrated in Municipal
Securities payable from revenues on similar projects, the Fund will be subject
to the peculiar risks presented by such projects to a greater extent than it
would be if its assets were not so concentrated.
Additional Information on Portfolio Instruments
- -----------------------------------------------
Variable and Floating Rate Instruments
--------------------------------------
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by a Fund, the Fund may, from time to time as specified in
the instrument, demand payment of the principal of the instrument or may resell
the instrument to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods that the Fund is
not entitled to exercise its demand rights, and the Fund could, for this or
other reasons, suffer a loss with respect to such instrument. While the Funds
in general will invest only in securities that mature within 13 months of the
date of purchase, they may invest in variable and floating rate instruments
which have nominal maturities in excess of 13 months if such instruments have
demand features that comply with conditions established by the Securities and
Exchange Commission (the "SEC").
Some of the instruments purchased by the Government Money and Treasury
Money Funds may also be issued as variable and floating rate instruments.
However, since they are issued or guaranteed by the U.S. government or its
agencies or instrumentalities, they may have a more active secondary market.
The Adviser will consider the earning power, cash flows and other
liquidity ratios of the issuers of variable and floating rate instruments and
will continuously monitor their financial ability to meet payment on demand. In
determining dollar-weighted average portfolio maturity and whether a variable or
floating rate instrument has a remaining maturity of 13 months or less, the
maturity of each instrument will be computed in accordance with guidelines
established by the SEC.
-4-
<PAGE>
Repurchase Agreements
---------------------
The Money, Government Money, Tax-Exempt Money and New York Tax-Exempt
Money Funds may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds'
custodian (or sub-custodian) or in the Federal Reserve/Treasury book-entry
system. The seller under a repurchase agreement will be required to maintain
the value of the securities which are subject to the agreement and held by a
Fund at not less than the repurchase price. Default or bankruptcy of the seller
would, however, expose a Fund to possible delay in connection with the
disposition of the underlying securities or loss to the extent that proceeds
from a sale of the underlying securities were less than the repurchase price
under the agreement. Repurchase agreements are considered loans by a Fund under
the 1940 Act. Income on repurchase agreements will be taxable.
Securities Lending
------------------
To increase return on their portfolio securities, the Money and
Government Money Funds may lend their portfolio securities to broker/dealers
pursuant to agreements requiring the loans to be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of
the U.S. government, its agencies or instrumentalities, or an irrevocable letter
of credit issued by a bank which meets the investment standards of these Funds,
or any combination thereof. Such loans will not be made if, as a result, the
aggregate of all outstanding loans of a Fund exceeds 30% of the value of its
total assets. When a Fund lends its securities, it continues to receive
interest or dividends on the securities lent and may simultaneously earn
interest on the investment of the cash loan collateral, which will be invested
in readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to lent securities pass to the borrower,
such loans may be called at any time and will be called so that the securities
may be voted by a Fund if a material event affecting the investment is to occur.
There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.
-5-
<PAGE>
When-Issued and Forward Transactions
------------------------------------
Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days.
The Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
-6-
<PAGE>
Stand-By Commitments
--------------------
Each Tax-Exempt Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a dealer or
bank agrees to purchase at the Fund's option, specified Municipal Securities at
a specified price. The amount payable to a Fund upon its exercise of a "stand-
by commitment" is normally (i) the Fund's acquisition cost of the Municipal
Securities (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. "Stand-by commitments" are exercisable by the Tax-Exempt
Funds at any time before the maturity of the underlying Municipal Securities,
and may be sold, transferred or assigned by a Fund only with the underlying
instruments.
The Tax-Exempt Funds expect that "stand-by commitments" will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a Fund may pay for a "stand-by commitment"
either separately in cash or by paying a higher price for securities which are
acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). When a Tax-Exempt Fund has paid
any consideration directly or indirectly for a "stand-by commitment," its cost
will be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
The Tax-Exempt Funds intend to enter into "stand-by commitments" only
with banks and broker/dealers which, in the Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. The
Tax-Exempt Funds will acquire "stand-by commitments" solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. "Stand-by commitments" acquired by a Tax-Exempt Fund would be
valued at zero in determining the Fund's net asset value.
Municipal Securities
--------------------
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Securities" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.
The two principal classifications of Municipal Securities which may be
held by the Tax-Exempt Funds are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues
-7-
<PAGE>
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as user fees of the facility being financed.
Each Tax-Exempt Fund's portfolio may also include "moral obligation"
securities, which are usually issued by public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund -- the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by a Tax-Exempt Fund.
The Tax-Exempt Funds may purchase custodial receipts evidencing the
right to receive either the principal amount or the periodic interest payments
or both with respect to specific underlying Municipal Securities. In general,
such "stripped" Municipal Securities are offered at a substantial discount in
relation to the principal and/or interest payments which the holders of the
receipt will receive. To the extent that such discount does not produce a yield
to maturity for the investor that exceeds the original tax-exempt yield on the
underlying Municipal Security, such yield will be exempt from federal income tax
for such investor to the same extent as interest on the underlying Municipal
Security. The Tax-Exempt Funds intend to purchase custodial receipts and
"stripped" Municipal Securities only when the yield thereon will be, as
described above, exempt from federal income tax to the same extent as interest
on the underlying Municipal Securities.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of NRSROs such as Moody's and S&P described in the Appendix
hereto represent their opinion as to the quality of Municipal Securities. It
should be emphasized that these ratings are general and are not absolute
standards of quality, and Municipal Securities with the same maturity, interest
rate, and rating may have different yields while Municipal Securities of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease
to be rated, or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multi-state
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer." An issuer's obligations under its Municipal Securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures
-8-
<PAGE>
extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Fund are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.
Among other instruments, the Tax-Exempt Funds may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, the Funds may invest in long-term
tax-exempt instruments, such as municipal bonds and private activity bonds, to
the extent consistent with the applicable maturity restrictions.
The New York Tax-Exempt Money Fund may invest in tax-exempt derivative
securities such as tender option bonds, participations, beneficial interests in
trusts, partnership interests, floating rate trust receipts or other forms. A
typical tax-exempt derivative security involves the purchase of an interest in a
Municipal Security or a pool of Municipal Securities which interest includes a
tender option, demand or other feature. Together, these features entitle the
holder of the interest to tender (or put) the underlying Municipal Security to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, Municipal Securities are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying municipal securities held by the custodian.
Under such arrangements, the holder of the custodial receipt has the option to
tender the underlying municipal security at its face value to the sponsor
(usually a bank or broker dealer or other financial institution), which is paid
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate that would cause the bond, coupled with the tender option, to trade at
par on the date of a rate adjustment.
Before purchasing a tax-exempt derivative for the New York Tax-Exempt
Money Fund, the Adviser is required by the Fund's Amortized Cost Procedures to
conclude that the tax-exempt security and the supporting short-term obligation
involve minimal credit risks and are Eligible Securities under the Procedures.
In evaluating the creditworthiness of the entity
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obligated to purchase the tax-exempt security, the Adviser will review
periodically the entity's relevant financial information.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax (and, with respect to New
York Municipal Securities, to the exemption of interest thereon from New York
State and New York City personal income taxes) are rendered by bond counsel to
the respective issuers at the time of issuance, and opinions relating to the
validity of and the tax-exempt status of payments received by the New York Tax-
Exempt Money Fund from tax-exempt derivatives are rendered by counsel to the
respective sponsors of such derivatives. The Funds and the Adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Securities, the creation of any tax-exempt
derivative securities, or the bases for such opinions.
Insured Municipal Securities
----------------------------
The New York Tax-Exempt Money Fund may purchase Municipal Securities
which are insured as to timely payment of principal and interest at the time of
purchase. The insurance policies will usually be obtained by the issuer of the
bond at the time of its original issuance. Bonds of this type will be acquired
only if at the time of purchase they satisfy quality requirements generally
applicable to Municipal Securities. Although insurance coverage for the
Municipal Securities held by the Fund reduces credit risk by insuring that the
Fund will receive timely payment of principal and interest, it does not protect
against market fluctuations caused by changes in interest rates and other
factors. The Fund may invest more than 25% of its net assets in Municipal
Securities covered by insurance policies.
Money Market Instruments
------------------------
"Money market instruments" that may be purchased by the Money,
Government Money, Tax-Exempt Money and New York Tax-Exempt Money Funds in
accordance with their investment objectives and policies include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations
acquired by the Money Fund may also include U.S. dollar-denominated obligations
of foreign branches of U.S. banks and obligations of domestic branches of
foreign banks. Investments in bank obligations are limited to the obligations
of financial institutions having more than $2 billion in total assets at the
time of purchase. Investments in bank obligations of foreign branches of
domestic financial institutions or of domestic branches of foreign banks are
limited so that no more than 5% of the value of the Fund's total assets may be
invested in any one branch, and that no more than 20% of the Fund's total assets
at the time of purchase may be invested in the aggregate in such obligations.
Investments in non-negotiable time deposits are
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limited to no more than 5% of the value of a Fund's total assets at time of
purchase, and are further subject to the overall 10% limit on illiquid
securities described below under "Illiquid Securities."
Investments in obligations of foreign branches of U.S. banks and of
U.S. branches of foreign banks may subject the Money Fund to additional
investment risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks. Investments in the obligations of U.S.
branches of foreign banks or foreign branches of U.S. banks will be made only
when the Adviser believes that the credit risk with respect to the instrument is
minimal.
Government Obligations
----------------------
The Funds may purchase government obligations which include
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Such investments may include obligations issued by the Farm
Credit System Financial Assistance Corporation, the Federal Financing Bank, the
General Services Administration, Federal Home Loan Banks and the Tennessee
Valley Authority. Obligations of certain agencies and instrumentalities of the
U.S. government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. government
would provide financial support to U.S. government-sponsored instrumentalities
if it is not obligated to do so by law. Obligations of such instrumentalities
will be purchased only when the Adviser believes that the credit risk with
respect to the instrumentality is minimal.
Securities issued or guaranteed by the U.S. government have
historically involved little risk of loss of principal if held to maturity.
However, due to fluctuations in interest rates, the market value of such
securities may vary during the period a shareholder owns Shares of a Fund.
The Treasury Money Fund primarily will purchase direct obligations of
the U.S. Treasury and obligations of those agencies or instrumentalities of the
U.S. government interest income from which is generally not subject to state and
local income taxes.
Investment Company Securities
-----------------------------
The Funds may invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. The Tax-Exempt Funds normally will
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invest in securities of investment companies only if such companies invest
primarily in high-quality, short-term Municipal Securities. The Government Money
and Treasury Money Funds intend to limit their acquisition of shares of other
investment companies to those companies which are themselves permitted to invest
only in securities which may be acquired by the respective Funds. Securities of
other investment companies will be acquired by a Fund within the limits
prescribed by the 1940 Act. Except as otherwise permitted under the 1940 Act,
each Fund currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund. In addition to the advisory fees and other
expenses a Fund bears directly in connection with its own operations, as a
shareholder of another investment company, a Fund would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the Fund's shareholders would indirectly bear the expenses of the Fund and
the other investment company, some or all of which would be duplicative. Any
change by the Funds in the future with respect to their policies concerning
investments in securities issued by other investment companies will be made only
in accordance with the requirements of the 1940 Act.
The Funds may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
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Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The SEC views reverse repurchase agreements as a form
of borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price of those securities.
Illiquid Securities
-------------------
Each Fund will not knowingly invest more than 10% of the value of its
net assets in securities that are illiquid. A security will be considered
illiquid if it may not be disposed of within seven days at approximately the
value at which the particular Fund has valued the security. Each Fund may
purchase securities which are not registered under the Securities Act of 1933,
as amended (the "Act"), but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Act. Any such security will not
be considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.
Miscellaneous
-------------
The Money, Government Money, Treasury Money and Tax-Exempt Money Funds
may not invest in oil, gas, or mineral leases.
Special Considerations Relating to New York Municipal Securities
- ----------------------------------------------------------------
Some of the significant financial considerations relating to the New
York Tax Exempt Fund's investments in New York Municipal Securities are
summarized below. This summary information is not intended to be a complete
description and is principally derived from the Annual Information Statement of
the State of New York as supplemented and contained in official statements
relating to issues of New York Municipal Securities that were available prior to
the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in those official statements have not
been independently verified.
State Economy. New York is one of the most populous states in the
-------------
nation and has a relatively high level of personal wealth. The State's
economy is diverse with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a very
small share of the nation's farming and mining activity. The State's
location and its excellent air transport facilities and natural harbors have
made it an important link in international commerce. Travel and tourism
constitute an important part of the
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<PAGE>
economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City (the "City") is a regional employment center for a
multi-state region, State personal income measured on a residence basis
understates the relative importance of the State to the national economy and the
size of the base to which State taxation applies.
The economic forecast of the State has also been modified for 2000 and
2001 from the mid-year forecast to reflect a stronger-than-expected economy.
Continued growth is projected for 2000 and 2001 for employment, wages, and
personal income, although the growth in employment will moderate from the 1999
pace. Personal income is estimated to have grown by 4.7 percent in 1999, fueled
in part by a large increase in financial sector bonus payments at the year's
end. Personal income is projected to grow 5.5 percent in 2000 and 4.8 percent
in 2001. Total bonus payments are projected to increase by 11 percent in 2000
and 10.5 percent in 2001. Overall employment growth is expected to continue at
a more modest pace than in 1999, reflecting the slower growth in the national
economy, continued spending restraint by government employers, and restructuring
in the manufacturing, health care, social service, and banking sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the
------------
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each
year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as passed by the Legislature. Prior to passing the budget in its
entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
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The State revised the cash-basis 1999-2000 State Financial Plan on
January 11, 2000, with the release of the 2000-01 Executive Budget. The State
updated the Financial Plan on January 31, 2000 to reflect the Governor's
amendments to his Executive Budget. After these changes, the Division of the
Budget ("DOB") now expects the State to close the 1999-2000 fiscal year with an
available cash surplus of $758 million in the General Fund, an increase of $733
million over the surplus estimate in the mid-year update. The larger projected
surplus derives from $499 million in net higher projected receipts and $259
million in net lower estimated disbursements. DOB revised both its projected
receipts and disbursements based on a review of actual operating results through
December 1999, as well as an analysis of underlying economic and programmatic
trends it believes may affect the Financial Plan for the balance of the year.
The State plans to use the entire $758 million surplus to make
additional deposits to reserve funds. At the close of the current fiscal year,
the State expects to deposit $75 million from the surplus into the State's Tax
Stabilization Reserve Fund ("TSRF") - the fifth consecutive annual deposit. In
the 2000-01 Executive Budget, as amended, the Governor is proposing to use the
remaining $683 million from the 1999-2000 surplus to fully finance the estimated
2001-02 and 2002-03 costs of his proposed tax reduction package ($433 million)
and to increase the Debt Reduction Reserve Fund ("DRRF") ($250 million).
DOB projects total General Fund disbursements of $37.06 billion in
1999-2000, a decline of $282 million from the October estimate. Of this amount,
$33 million is related to the timing of spending and accounting adjustments and
therefore does not contribute to the surplus projected by DOB. The $33 million
consists of lower timing-related spending of $65 million from the Community
Projects Fund ("CPF") and $50 million from the Collective Bargaining Reserve,
offset by the Medicaid reclassification of $82 million described above.
Accordingly, lower disbursements since October contribute $249 million to the
1999-2000 surplus, which, when combined with the $10 million in lower
disbursements recognized in the mid-year update, produce a total reduction in
estimated disbursements of $259 million for the current year.
State Operations spending is now projected to total $6.63 billion in
1999-2000. In the revised Financial Plan, $50 million of an original $100
million for new collective bargaining costs is set aside in a reserve to cover
the cost of labor agreements in 1999-2000, and the balance is transferred to
General State Charges in the current year to pay for the recently approved labor
contract with State University employees and other labor costs. The remaining
revisions to the State Operations estimate are comprised of savings from agency
efficiencies and timing-related changes that do not affect the surplus.
The State projects a closing balance of $1.17 billion in the General
Fund, after the tax refund reserve transaction. The balance is comprised of
$548 million in the Tax Stabilization Reserve Fund ("TSRF") after a $75 million
deposit in 1999-2000; $265 million in the CPF, which pays for Legislative
initiatives; $250 million in the DRRF; and $107 million in the Contingency
Reserve Fund ("CRF") (which guards against litigation risks).
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<PAGE>
In addition to the General Fund closing balance of $1.17 billion, the
State will have a projected $3.09 billion in the tax refund reserve account at
the end of 1999-2000. The refund reserve account is used to adjust personal
income tax collections across fiscal years to pay for tax refunds, as well as to
accomplish other Financial Plan objectives. The projected balance of $3.09
billion is comprised of $1.82 billion in tax reduction reserves from the 1998-99
surplus; $683 million from the 1999-2000 surplus; $521 million from LGAC that
may be used to pay tax refunds during 2000-01 but must be on deposit at the
close of the fiscal year; $50 million in collective bargaining reserves from
1999-2000; and $25 million in reserves for tax credits.
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 received
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.
The Governor presented his 2000-01 Executive Budget to the Legislature
on January 10, 2000. The Executive Budget contains financial projections for
the State's 1999-2000 through 2002-03 fiscal years, a detailed explanation of
receipts estimates and the economic forecast on which it is based, and proposed
Capital Program and Financing Plan for the 2000-01 through 2004-05 fiscal years.
On January 31, 2000, the Governor submitted amendments to his Executive Budget,
the most significant of which recommends eliminating all gross receipts taxes on
energy providers.
There can be no assurance that the Legislature will enact into law the
Governor's Executive Budget, as amended, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth therein.
The 2000-01 Financial Plan is projected to have receipts in excess of
disbursements on a cash basis in the General Fund, after accounting for the
transfer of available receipts from 1999-2000 to 2000-01. Under the Governor's
Executive Budget, as amended, total General Fund receipts, including transfers
from other funds, are projected at $38.62 billion, an increase of $1.28 billion
(3.4 percent) over the current fiscal year. General Fund disbursements,
including transfers to other funds, are recommended to grow by 2.3 percent to
$37.93 billion, an increase of $869 million over 1999-2000. State Funds
spending (the portion of the budget supported exclusively by State taxes, fees,
and revenues) is projected to total $52.46 billion, an increase of $2.57 billion
or 5.1 percent. Spending from All Government Funds is expected to grow by 5.5
percent, increasing by $4.0 billion to $76.82 billion.
The State projects a closing balance of $1.61 billion in the General
Fund at the end of 2000-01. This balance is comprised of a $433 million reserve
set aside from the 1999-2000 surplus to finance the estimated costs of the
Governor's proposed tax reduction package in 2001-02 and 2002-03, $475 million
in cumulative reserves for collective
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<PAGE>
bargaining ($425 million from 2000-01 plus $50 million from 1999-2000), $548
million in the TSRF, and $150 million in the CRF after a proposed $43 million
deposit in 2000-01. The change in the closing fund balance compared to 1999-2000
results from the planned use in 2000-01 of $265 million for existing legislative
initiatives financed from the CPF and the reclassification of DRRF into the CPF,
offset by increased reserves for collective bargaining, tax reduction, and
litigation discussed above.
In addition to the General Fund closing balance of $1.61 billion, the
State will have a projected $567 million in the tax refund reserve at the end of
2000-01. Also, $1.2 billion is proposed to be on deposit in the Star Special
Revenue Fund to be used in 2001-02 for State-funded local tax reductions and
$250 million is proposed to be on deposit in the DRRF. The balance in the DRRF
is projected to be used in 2001-02 to retire existing high-cost State-supported
debt and increase pay-as-you-go financing of capital projects.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to
fiscal year and are influenced by governments, institutions, and organizations
that are not subject to the State's control. The State Financial Plan is also
necessarily based upon forecasts of national and State economic activity.
Economic forecasts have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies. The DOB believes
that its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
The projections assume no changes in federal tax law, which could substantially
alter the current receipts forecast. In addition, these projections do not
include funding for new collective bargaining agreements after the current
contracts expire. Actual results, however, could differ materially and
adversely from their projections, and those projections may be changed
materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by
--------------------------------
which the State of New York 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
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.
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, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
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<PAGE>
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the LGAC to restructure the way the State
makes certain local aid payments.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of higher-than-
projected tax receipts and in lower-than-expected entitlement spending. The
State assumes that the 2000-01 Financial Plan will achieve $500 million in
savings from initiatives by State agencies to deliver services more efficiently,
workforce management efforts, maximization of federal and non-General Fund
spending offsets, and other actions necessary to help bring projected
disbursements and receipts into balance. The projections do not assume any gap-
closing benefit from the potential settlement of State claims against the
tobacco industry.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds. Subsequent
to that time, the State's general obligations have not been downgraded by S&P.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
New York 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.
Litigation. Certain litigation pending against New York State or its
----------
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements
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and treaties by which various Indian tribes transferred title to New York State
of certain land in central and upstate New York; (2) certain aspects of New York
State's Medicaid policies, including its rates, regulations and procedures; (3)
action seeking enforcement of certain sales and excise taxes and tobacco
products and motor fuel sold to non-Indian consumers on Indian reservations; and
(4) a challenge to the Governor's application of his constitutional line item
veto authority.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to
prior funding levels. Such funding is expected to exceed prior levels by $116
million in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241
million in fiscal 1998-99. Beginning in fiscal 2001-02, State contributions
required under the Comptroller's plan are projected to be less than that
required under the prior funding method. As a result of the United States
Supreme Court decision in the case of State of Delaware v. State of New York, on
January 21, 1994, the State entered into a settlement agreement with various
parties. Pursuant to all agreements executed in connection with the action, the
State was required to make aggregate payments of $351.4 million. Annual
payments to the various parties will continue through the State's 2002-03
fiscal year in amounts which will not exceed $48.4 million in any fiscal year
subsequent to the State's 1994-95 fiscal year. Litigation challenging the
constitutionality of the treatment of certain moneys held in a reserve fund was
settled in June 1996 and certain amounts in a Supplemental Reserve Fund
previously credited by the State against prior State and local pension
contributions were paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could
affect adversely the financial condition of the State in the current fiscal year
or thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings
could exceed the amount of the reserve established in the State's financial
plan for the payment of judgments and, therefore, could affect the ability of
the State to maintain a balanced financial plan.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority,
as a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as
a matter of law, to impose or collect significant amounts of taxes and revenues.
On November 23, 1998, the attorneys general for forty-six states
(including New York) entered into a master settlement agreement ("MSA") with the
nation's largest tobacco manufacturers. Under the terms of the MSA, the states
agreed to release the manufacturers from all smoking-related claims in exchange
for specified payments and the
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imposition of restrictions on tobacco advertising and marketing. New York is
projected to receive $25 billion over 25 years under the MSA, with payments
apportioned among the State (51 percent), counties (22 percent), and New York
City (27 percent). The projected payments are an estimate and subject to
adjustments for, among other things, the annual change in the volume of
cigarette shipments and the rate of inflation.
From 1999-2000 through 2002-03, the State expects to receive $1.54
billion under the nationwide settlement with cigarette manufacturers. Counties,
including New York City, will receive settlement payments of $1.47 billion over
the same period.
Authorities. The fiscal stability of New York State is related, in
-----------
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit
markets could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is State-
supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since 1995. As a
result of the structural imbalances in JDA's capital structure, and defaults
in its loan portfolio and loan guarantee program incurred between 1991 and 1996,
JDA would have experienced a debt service cash flow shortfall had it not
completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. JDA recently resumed its lending activities under a revised set
of lending programs and underwriting guidelines.
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<PAGE>
New York City and Other Localities. The fiscal health of the State
----------------------------------
may also be impacted by the fiscal health of its localities, particularly the
City, which has required and continues to require significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets will be adopted by the April 1
statutory deadline or that any such reductions or delays will not have adverse
effects on the City's cash flow or expenditures. In addition, the Federal
budget negotiation process could result in a reduction in or a delay in the
receipt of Federal grants which could have additional adverse effects on the
City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell short-
term notes to the public again until 1979. 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 February 3, 1998 and again on May 27, 1998, S&P assigned a BBB+
rating to the City's general obligation debt and placed the ratings on
CreditWatch with positive implications. On March 9, 1999, S&P assigned its
A-rating to Series 1999H of New York City general obligation bonds and affirmed
the A- rating on various previously issued New York City bonds. Subsequent to
that time, the City's general obligation bonds have not been downgraded by S&P.
Moody's ratings of City bonds were revised in November 1981 from B
(in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to
Baa1, in May 1988 to A and again in February 1991 to Baa1. On February 25, 1998,
Moody's upgraded approximately $28 billion of the City's general obligations
from Baa1 to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's
general obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A. Subsequent to that time, the
City's general obligation bonds have not been downgraded by Fitch IBCA.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975.
Since its creation, MAC has provided, among other things, financing assistance
to the City by refunding maturing City short-term debt and transferring to the
City funds received from sales of MAC bonds and notes. MAC is authorized to
issue bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on
July 2, 1975, failure by the State to pay
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such aid revenues and the reduction of such aid revenues below a specified level
are included among the events of default in the resolutions authorizing MAC's
long-term debt. The occurrence of an event of default may result in the
acceleration of the maturity of all or a portion of MAC's debt. MAC bonds and
notes constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the
"Control Board") and since 1978 the City's financial statements have been
audited by independent accounting firms. To be eligible for guarantees and
assistance, the City is required during a "control period" to submit annually
for Control Board approval, and when a control period is not in effect for
Control Board review, a financial plan for the next four fiscal years covering
the City and certain agencies showing balanced budgets determined in accordance
with GAAP. New York State also established the Office of the State Deputy
Comptroller for New York City ("OSDC") to assist the Control Board in
exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control period.
This means that the Control Board's powers of approval are suspended, but the
Board continues to have oversight responsibilities.
Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in its
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.
The projections set forth in the City's Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. 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. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, wage increases for City employees
consistent with those assumed in the Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance the rehabilitation of its
infrastructure and other capital needs and to refinance existing debt, as well
as for seasonal financing needs. In fiscal year 1998 and again in fiscal year
2000, the State constitutional debt limit would have prevented the
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City from entering into new capital contracts. To prevent these disruptions in
the capital program, two entities were created to issue debt to increase the
City's capital financing capacity: (i) the State Legislature created the
Transitional Finance Authority ("TFA") in 1997, and (ii) the City created the
Tobacco Settlement Asset Securitization Corporation in 1999. Despite these
actions, the City, in order to continue its capital program, will need
additional financing capacity in fiscal year 2002, which could be provided
through increasing the borrowing authority of the TFA or amending the State
constitutional debt limit.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
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 delay in the adoption of the State's budget in
certain past fiscal years has required the City to issue short-term notes in
amounts exceeding those expected early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York 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 State's projections of its receipts and disbursements for the
fiscal year.
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. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State
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<PAGE>
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 localities and require increasing the State assistance in the future.
Year 2000 Compliance. To date, the State has experienced no
significant Year 2000 computer disruptions. Monitoring will continue over the
next few months to identify and correct any problems that may arise. However,
there can be no assurance that outside parties who provide goods and services
to the State will not experience computer problems related to Year 2000
programming in the future, or that such disruptions, if they occur, will not
have an adverse impact on State operations or finances.
Investment Limitations
- ----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a
Fund only by a vote of the holders of a majority of such Fund's outstanding
shares. As used herein, a "vote of the holders of a majority of the outstanding
shares" of a Company or a particular Fund means, with respect to the approval of
an investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of such Company or such Fund, or (b) 67% or more of the shares of such
Company or such Fund present at a meeting if more than 50% of the outstanding
shares of such Company or such Fund are represented at the meeting in person or
by proxy. Investment limitations which are "operating policies" with respect to
the Funds may be changed by the Companies' Boards of Directors without
shareholder approval.
No Fund may:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Taxable Funds might be deemed to
be underwriters upon disposition of certain portfolio securities acquired within
the limitation on purchases of restricted securities; and except to the extent
that purchase by the Tax-Exempt Money Fund of Municipal Securities or other
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;
and except to the extent that purchase by the New York Tax-Exempt Money Fund of
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;
2. Purchase or sell real estate, except that each Taxable Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate; and except that the
Tax-Exempt Money Fund may invest in Municipal Securities secured by real estate
or interests therein; and except that the New York Tax-Exempt Money Fund may
invest in securities secured by real estate or interests therein;
3. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or other mineral exploration or development programs; and
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<PAGE>
4. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitations might be considered to be the
issuance of a senior security.
Each of the Money, Government Money, Treasury Money and Tax-Exempt
Money Funds may not:
5. Purchase securities of any one issuer if immediately after such
purchase more than 5% of the value of its total assets would be invested in the
securities of such issuer, provided that up to 25% of the value of each Fund's
total assets may be invested without regard to this 5% limitation;
notwithstanding the foregoing restriction, each Fund may invest without regard
to the 5% limitation in Government Securities (as defined in the 1940 Act) and
as otherwise permitted in accordance with Rule 2a-7 under the 1940 Act or any
successor rule;
6. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) A Fund will not purchase
portfolio securities while borrowings in excess of 5% of its total assets are
outstanding;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position; and
8. Invest in or sell puts, calls, straddles, spreads, or any
combination thereof.
Each of the Money, Government Money and Treasury Money Funds may not:
9. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and the
Money Fund and the Government Money Fund may enter into repurchase agreements
with respect to obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and (ii) the Money Fund and the Government Money
Fund may lend portfolio securities in an amount not exceeding 30% of their total
assets;
10. Invest in bank obligations having remaining maturities in excess
of one year, except that securities subject to repurchase agreements may bear
longer maturities;
11. Invest in companies for the purpose of exercising management or
control;
12. Invest more than 5% of a Fund's total assets in securities issued
by companies which, together with any predecessor, have been in continuous
operation for fewer than three years;
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<PAGE>
13. Purchase foreign securities; except the Money Fund may purchase
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks and foreign branches of U.S. banks
in an amount not to exceed 20% of its total net assets;
14. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act;
15. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of a Fund's total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of its total assets
would be invested in foreign branches of financial institutions or in domestic
branches of foreign banks;
16. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
securities issued or guaranteed by the U.S. government or domestic bank
obligations, and (b) neither all finance companies, as a group, nor all utility
companies, as a group, are considered a single industry for purposes of this
policy; and
17. Knowingly invest more than 10% of the value of a Fund's total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available.
The Tax-Exempt Money Fund may not:
18. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
19. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation;
20. Knowingly invest more than 10% of the value of its total assets
in securities which may be illiquid in light of legal or contractual
restrictions on resale or the absence of readily available market quotations;
21. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the
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<PAGE>
United States; any state or territory; any possession of the U.S. government;
the District of Columbia; or any of their authorities, agencies,
instrumentalities, or political subdivisions; and
22. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that the Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.
The New York Tax-Exempt Money Fund may not:
23. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
24. Invest less than 80% of its net assets in securities the interest
on which is exempt from federal income tax, except during defensive periods or
periods of unusual market conditions;
25. Borrow money or mortgage, pledge, or hypothecate its assets
except to the extent permitted under the 1940 Act; and
26. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the U.S.
government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions, and repurchase agreements secured by such securities.
The Treasury Money Fund may not:
27. Purchase securities other than obligations issued or guaranteed
by the U.S. Treasury or an agency or instrumentality of the U.S. government and
securities issued by investment companies that invest in such obligations.
In addition, the New York Tax-Exempt Money Fund is subject to the
following non-fundamental limitations, which may be changed without shareholder
approval. The New York Tax-Exempt Money Fund may not:
28. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that the Fund may obtain short-term credit as
may be necessary for the clearance of portfolio transactions;
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<PAGE>
29. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act;
30. Invest in companies for the purpose of exercising management or
control; and
31. Invest more than 10% of its net assets in illiquid securities.
* * *
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
In Investment Limitation No. 5 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed as to principal or interest by the United States, or by a
person controlled or supervised by and acting as an instrumentality of the
government of the United States, or any certificate of deposit for any of the
foregoing, are deemed to be Government Securities.
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
Notwithstanding Investment Limitations Nos. 17 and 20 above, the
Companies intend to limit the Funds' investments in illiquid securities to 10%
of each Fund's net (rather than total) assets.
Notwithstanding the proviso in Investment Limitation No. 21, to the
extent that the Tax-Exempt Money Fund has invested more than 20% of the value of
its assets in taxable securities on a temporary defensive basis, the industry
diversification limitation in Investment Limitation No. 21 shall apply to
taxable securities issued or guaranteed by any state, territory, or possession
of the U.S. government; the District of Columbia; or any of their authorities,
agencies, instrumentalities, or political subdivisions.
In order to obtain a rating from a rating organization, a Fund will
comply with special investment limitations.
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<PAGE>
NET ASSET VALUE AND NET INCOME
------------------------------
The Companies use the amortized cost method of valuation to value
Shares in the Funds. Pursuant to this method, a security is valued at its cost
initially, and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of fluctuating interest rates on
the market value of the security. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Fund involved would receive if it sold the security. The market value of
portfolio securities held by the Funds can be expected to vary inversely with
changes in prevailing interest rates.
The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated.
If the Boards of Directors believe that the extent of any deviation from a
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take appropriate
steps to eliminate or reduce, to the extent reasonably practicable, any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming Shares in kind; reducing the number
of the Fund's outstanding Shares without monetary consideration; or utilizing a
net asset value per Share determined by using available market quotations.
Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and discount earned on a Fund's assets, less (ii) amortization
of market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of a Company (e.g., administrative, legal, accounting, and directors' fees)
prorated to each portfolio of the Company on the basis of their relative net
assets.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Companies' sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
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<PAGE>
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of Shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Purchase of Shares
Shares of the Funds are offered for sale at their net asset value
per Share next computed after a purchase request is received in good order by
the Companies' sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
Shares in order to accommodate different types of investors.
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors or to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase Shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
Shares selected by the Customer. Investors purchasing Shares may include
officers, directors, or employees of the particular Shareholder
Organization.
Institutional Shares may be purchased directly only by financial
institutions ("Institutional Investors"). Retail Shares may be purchased
directly by individuals ("Direct Investors") or by Institutional Investors
(collectively with Direct Investors, "Investors"). Retail Shares may also be
purchased by Customers of the Adviser, its affiliates and correspondent
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<PAGE>
banks, and other Shareholder Organizations that have entered into agreements
with the Companies.
A Shareholder Organization may elect to hold of record Shares for its
Customers and to record beneficial ownership of Shares on the account statements
provided by it to its Customers. If it does so, it is the Shareholder
Organization's responsibility to transmit to the Distributor all purchase
requests for its Customers and to transmit, on a timely basis, payment for such
requests to Chase Global Funds Services Company ("CGFSC"), the Funds' sub-
transfer agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
(and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Funds, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Funds bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."
Redemption Procedures
- ---------------------
Customers of Shareholder Organizations holding Shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Companies, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming Shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their Shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).
-31-
<PAGE>
Shares may be redeemed by an Investor by submitting a written request
for redemption to:
Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
As discussed in the Prospectus, a redemption request for an amount
in excess of $50,000 per account, or for any amount if the proceeds are to be
sent elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for Retail Shares
redeemed will ordinarily be made by mail within five Business Days after receipt
by CGFSC of the redemption request in good order. Payment for Institutional
Shares redeemed will normally be sent the next Business Day after receipt by
CGFSC of the redemption request in good order. Questions with respect to the
proper form for redemption requests should be directed to CGFSC at (800) 446-
1012 (from overseas, call (617) 557-8280).
Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem Shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Investor's account at any commercial bank in the United States. Institutional
Investors may also redeem Shares by instructing CGFSC by telephone at
(800) 446-1012 or by terminal access.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
- ----------------------------
Except as described in "Investor Programs" below, Investors may be
required to redeem Shares in a Fund after 60 days' written notice if due to
Investor redemptions the balance
-32-
<PAGE>
in the particular account with respect to the Fund remains below $500. If a
Customer has agreed with a particular Shareholder Organization to maintain a
minimum balance in his or her account at the institution with respect to Shares
of a Fund, and the balance in such account falls below that minimum, the
Customer may be obliged by the Shareholder Organization to redeem all or part of
his or her Shares to the extent necessary to maintain the required minimum
balance.
The Companies may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
The Companies reserve the right to honor any request for redemption or
repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by the Companies and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. Each Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its Shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.
Under certain circumstances, the Companies may, in their discretion,
accept securities as payment for Shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a bona fide
---- ----
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An Investor who owns Retail Shares with a value of $10,000 or more may
begin a Systematic Withdrawal Plan. The withdrawal can be on a monthly,
quarterly, semiannual or annual basis. There are four options for such
systematic withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
-33-
<PAGE>
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for Retail Shares with CGFSC. Under
this Plan, dividends and distributions are automatically reinvested in
additional Retail Shares of a Fund. Amounts paid to investors under this Plan
should not be considered as income. Withdrawal payments represent proceeds from
the sale of Retail Shares, and there will be a reduction of the shareholder's
equity in the Fund involved if the amount of the withdrawal payments exceeds the
dividends and distributions paid on the Retail Shares and the appreciation of
the Investor's investment in the Fund. This in turn may result in a complete
depletion of the shareholder's investment. An Investor may not participate in a
program of systematic investing in a Fund while at the same time participating
in the Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
Retail Shares having a value of at least $500 for Shares of any other portfolio
of the Companies or for Shares of Excelsior Institutional Trust. Institutional
Shares may be exchanged for Institutional Shares of any portfolio of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.
Shares may be exchanged by wire, telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. The Companies and Excelsior
Institutional Trust may modify or terminate the exchange program at any time
upon 60 days' written notice to shareholders, and may reject any exchange
request. Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, such program directly
from their Shareholder Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the
-34-
<PAGE>
sales load otherwise applicable to the new shares (by virtue of the Companies'
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged shares but may be included (subject
to the limitation) in the tax basis of the new shares.
Retirement Plans
- ----------------
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):
IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit themselves and
their employees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase
Shares of the Funds pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.
Automatic Investment Program
- ----------------------------
The Automatic Investment Program permits Investors to purchase Retail
Shares (minimum of $50 per Fund per transaction) at regular intervals selected
by the Investor. The minimum initial investment for an Automatic Investment
Program account is $50 per Fund. Provided the Investor's financial institution
allows automatic withdrawals, Retail Shares are purchased by transferring funds
from an Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and Retail Shares will be purchased, once a month, on
either the first or fifteenth day, or twice a month, on both days.
Additional Information
- ----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
-35-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
----------------------------
Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of common stock, $0.001 par
value per share; and Excelsior Tax-Exempt Fund's Charter authorizes its Board of
Directors to issue up to fourteen billion full and fractional shares of common
stock, $0.001 par value per share. Both Charters authorize the respective
Boards of Directors to classify or reclassify any unissued shares of the
respective Companies into one or more additional classes or series by setting or
changing in any one or more respects their respective preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the particular Company's Board of
Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued
for payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund,
shareholders of that Fund are entitled to receive the assets available for
distribution belonging to that Fund and a proportionate distribution, based upon
the relative asset values of the portfolios of the Company involved, of any
general assets of that Company not belonging to any particular portfolio of that
Company which are available for distribution. In the event of a liquidation or
dissolution of either Company, shareholders of such Company will be entitled to
the same distribution process.
Shareholders of the Companies are entitled to one vote for each full
Share held, and fractional votes for fractional Shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of a Company's
aggregate outstanding Shares may elect all of that Company's directors,
regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of each Company voting
without regard to class.
-36-
<PAGE>
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding Shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The
exercise of such authority by the Boards of Directors will be subject to the
provisions of the 1940 Act, and the Boards of Directors will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of a Company's Common Stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, each
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of its outstanding common stock voting without regard to class.
Certificates for Shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional Shares.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The business and affairs of the Funds are managed under the direction
of the Companies' Boards of Directors. The directors and executive officers of
the Companies, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
-37-
<PAGE>
<TABLE>
<CAPTION>
Position with the
----------------- Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Chairman of the Boards (since 1997), and
238 June Road President and Treasurer President, Treasurer and Director (since 1995) of the
Stamford, CT 06903 Companies; Chairman of the Board (since 1997),
Age: 68 President, Treasurer and Trustee of Excelsior
Institutional Trust (since 1995); Chairman of the
Board (from 1997 to 1999), President, Treasurer and
Trustee of Excelsior Funds (from 1995 to 1999); Vice
Chairman of U.S. Trust Corporation and U.S. Trust New
York (from February 1990 until September 1995); and
Chairman, U.S. Trust Company (from March 1993 to May
1997).
Donald L. Campbell Director Retired; Director of the Companies (since 1984);
333 East 69th Street Director of UST Master Variable Series, Inc. (from
Apt. 10-H 1994 to June 1997); and Trustee of Excelsior
New York, NY 10021 Institutional Trust (since 1995).
Age: 73
Rodman L. Drake Director Director of the Companies (since 1996); Trustee of
Continuation Investments Group, Inc. Excelsior Institutional Trust (since 1994); Trustee,
1251 Avenue of the Americas Excelsior Funds (from 1994 to 1999); Director,
9/th/ Floor Parsons Brinkerhoff, Inc. (engineering firm) (since
New York, NY 10020 1995); President, Continuation Investments Group,
Age: 56 Inc. (since 1997); President, Mandrake Group
(investment and consulting firm) (1994-1997);
Chairman, MetroCashcard International, Inc.
(1999-present); Director, Hotelivision, Inc.
(1999-present); Director, Alliance Group Services,
Inc. (1998-present); Director, Hyperion Total Return
Fund, Inc. and three other funds for which Hyperion
Capital Management, Inc. serves as investment adviser
(since 1991); Co-Chairman, KMR Power Corporation
(power plants) (from 1993 to 1996); Director, The
Latin America Smaller Companies Fund, Inc.
(1993-1998); Member of Advisory Board, Argentina
Private Equity Fund L.P. (from 1992 to 1996) and
Garantia L.P. (Brazil) (from 1993 to 1996); and
Director, Mueller Industries, Inc. (from 1992 to
1994).
Joseph H. Dugan Director Retired; Director of the Companies (since 1984);
913 Franklin Lake Road Director of UST Master Variable Series, Inc. (from
Franklin Lakes, NJ 07417 1994 to June 1997); and Trustee of Excelsior
Age: 74 Institutional Trust (since 1995).
</TABLE>
____________________________
/1./ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-38-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since 1986);
2320 Cumberland Road Director of UST Master Variable Series, Inc. (from
Charlottesville, VA 22901-7726 1994 to June 1997); Trustee of Excelsior
Age: 79 Institutional Trust (since 1995); Director, Deutsche
Bank Financial, Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and Trustee, HSBC
Funds Trust and HSBC Mutual Funds Trust (since 1988).
Jonathan Piel Director Director of the Companies (since 1996); Trustee of
558 E. 87th Street Excelsior Institutional Trust (since 1994); Trustee
New York, NY 10128 of Excelsior Funds (from 1994 to 1999); Vice
Age: 60 President and Editor, Scientific American, Inc. (from
1986 to 1994); Director, Group for The South Fork,
Bridgehampton, New York (since 1993); and Member,
Advisory Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology (since 1984).
Robert A. Robinson Director Director of the Companies (since 1987); Director of
Church Pension Group UST Master Variable Series, Inc. (from 1994 to June
445 Fifth Avenue 1997); Trustee of Excelsior Institutional Trust
New York, NY 10017 (since 1995); President Emeritus, The Church Pension
Age: 73 Fund and its affiliated companies (since 1966);
Trustee, H.B. and F.H. Bugher Foundation and Director
of its wholly owned subsidiaries--- Rosiclear Lead
and Flourspar Mining Co. and The Pigmy Corporation
(since 1984); Director, Morehouse Publishing Co.
(1974-1998); Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and Director,
Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/2/ Director Retired; Director of the Companies (since 1985);
6549 Pine Meadows Drive Chairman of the Board of Excelsior Fund and Excelsior
Spring Hill, FL 34606 Tax-Exempt Fund (1991-1997) and Excelsior
Age: 74 Institutional Trust (1996-1997); President and
Treasurer of Excelsior Fund and Excelsior Tax-Exempt
Fund (1994-1997) and Excelsior Institutional Trust
(1996-1997); Chairman of the Board, President and
Treasurer of UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior Institutional
Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56
</TABLE>
______________________________
/2/ This Director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-39-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase Global Funds
Chase Global Funds Services Company Services Company (November 1996 to present); and
73 Tremont Street Officer and Manager of Financial Reporting, Investors
Boston, MA 02108-3913 Bank & Trust Company (January 1991 to November 1996).
Age: 38
Patricia M. Leyne Assistant Treasurer Vice President, Senior Manager of Fund
Chase Global Funds Services Company Administration, Chase Global Funds Services Company
73 Tremont Street (since August 1999); Assistant Vice President,
Boston, MA 02108-3913 Senior Manager of Fund Administration, Chase Global
Age: 32 Funds Services Company (from July 1998 to August
1999); Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds Services Company
(from November 1996 to July 1998); Supervisor, Chase
Global Funds Services Company (from September 1995 to
November 1996); Fund Administrator, Chase Global
Funds Services Company (from February 1993 to
September 1995).
</TABLE>
Each director receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum with respect to each
Company for services in such capacity. Drinker Biddle & Reath LLP, of which
Messrs. McConnel and Malloy are partners, receives legal fees as counsel to the
Companies. The employees of CGFSC do not receive any compensation from the
Companies for acting as officers of the Companies. No person who is currently
an officer, director or employee of the Adviser serves as an officer, director
or employee of the Companies. As of May 18, 2000, the directors and officers
of each Company as a group owned beneficially less than 1% of the outstanding
shares of each fund of each Company, and less than 1% of the outstanding shares
of all funds of each Company in the aggregate.
-40-
<PAGE>
The following chart provides certain information about the fees received by
the Companies' directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Total
Compensation
from the
Pension or Retirement Companies
Aggregate Benefits Accrued Estimated Annual and Fund
Name of Compensation from as Part of Benefits Upon Complex*
Person/Position the Companies Fund Expenses Retirement Paid to Directors
- --------------- ------------- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Donald L. Campbell $_______ None None _______ (3)**
Director
Rodman L. Drake $_______ None None _______ (4)**
Director
Joseph H. Dugan $_______ None None _______ (3)**
Director
Wolfe J. Frankl $_______ None None _______ (3)**
Director
Jonathan Piel $_______ None None _______ (4)**
Director
Robert A. Robinson $_______ None None _______ (3)**
Director
Alfred C. Tannachion $_______ None None _______ (3)**
Director
Frederick S. Wonham $_______ None None _______ (4)**
Chairman of the Board,
President and Treasurer
</TABLE>
__________________
* The "Fund Complex" consists of the Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Institutional Trust, and, until December 15, 1999, Excelsior
Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
-41-
<PAGE>
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U. S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectus. The Adviser has also agreed to pay all expenses incurred by it
in connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, if any, purchased for the
Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds pursuant to advisory agreements substantially similar to the Investment
Advisory Agreements currently in effect for the Funds.
For the services provided and expenses assumed pursuant to its
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly, at the annual rate of 0.25% of the average
daily net assets of each of the Money, Government Money and Tax-Exempt Money
Funds; 0.30% of the Treasury Money Fund's average daily net assets; and 0.50% of
the New York Tax-Exempt Money Fund's average daily net assets.
From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Companies paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
<S> <C> <C> <C>
Money Fund $ $1,475,748 $1,036,066
Government Money Fund $ $1,381,779 $1,216,265
Treasury Money Fund $ $1,403,045 $1,108,480
Tax-Exempt Money Fund $ $2,696,982 $2,325,765
New York Tax-Exempt Money $ $ 277,593 $ 0
Fund
</TABLE>
-42-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Adviser voluntarily agreed to waive a portion of its advisory fee for certain
funds. During the periods stated, these waivers reduced advisory fees by the
following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
<S> <C> <C> <C>
Money Fund $ $358,360 $231,368
Government Money Fund $ $184,188 $168,737
Treasury Money Fund $ $151,843 $ 82,614
Tax-Exempt Money Fund $ $827,107 $627,413
New York Tax-Exempt Money $ $532,521 $ 0
Fund
</TABLE>
The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreements to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.
As discussed in the prospectus, U.S. Trust Corporation, parent of U.S.
Trust, and The Charles Schwab Corporation entered into a definitive agreement to
merge on January 12, 2000. After the merger, U.S. Trust Corporation will be a
wholly-owned subsidiary of Schwab. The merger is anticipated to close by July
2000; however, it is subject to a number of conditions, including certain
regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Funds
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreements (the
"Existing Agreements"). Accordingly, the shareholders of the Funds have been
asked to approve new investment advisory agreements ("New Agreements") between
the Funds and U.S. Trust. The New Agreements will become effective upon the date
of the merger. If the merger is not consummated, the Funds will operate under
the New Agreements, which will become effective upon the date of termination of
the merger agreement.
-43-
<PAGE>
The New Agreements contain substantially the same terms and conditions
as the Existing Agreements, and the advisory fee will remain the same under the
New Agreements.
CGFSC, Federated Administrative Services, an affiliate of the
Distributor, and U.S. Trust Company (together, the "Administrators") serve as
the Companies' administrators and provide the Funds with general administrative
and operational assistance. Under the Administration Agreements, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt-interest dividends," and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing Share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Money, Government Money, Treasury Money and
Tax-Exempt Money Funds' administrators pursuant to administration agreements
substantially similar to the Administration Agreements currently in effect for
the Funds.
The Administrators also provide administrative services to the other
investment portfolios of the Companies and to all of the investment portfolios
of Excelsior Institutional Trust which are also advised by U.S. Trust and its
affiliates and distributed by the Distributor. For services provided to all of
the investment portfolios of the Companies and Excelsior Institutional Trust
(except for the international portfolios of Excelsior Fund and Excelsior
Institutional Trust), the Administrators are entitled jointly to fees, computed
daily and paid monthly, based on the combined aggregate average daily net assets
of the three companies (excluding the international portfolios of Excelsior Fund
and Excelsior Institutional Trust) as follows:
Combined Aggregate Average Daily Net Assets
of Excelsior Fund, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust (excluding
the international portfolios of Excelsior Fund
and Excelsior Institutional Trust)
---------------------------------
Annual Fee
----------
First $200 million................................... 0.200%
Next $200 million.................................... 0.175%
Over $400 million.................................... 0.150%
Administration fees payable to the Administrators by each portfolio of
the Companies and Excelsior Institutional Trust are allocated in proportion to
their relative average daily net assets at the time of determination. From time
to time, the Administrators may
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<PAGE>
voluntarily waive all or a portion of the administration fee payable to them by
a Fund, which waivers may be terminated at any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
<S> <C> <C> <C>
Money Fund $ $1,122,463 $ 11
Government Money Fund $ $ 958,200 $172
Treasury Money Fund $ $ 792,993 $ 0
Tax-Exempt Money $ $2,156,742 $ 0
New York Tax-Exempt Money $ $ 248,317 $ 0
Fund
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
<S> <C> <C> <C>
Money Fund $ $ 775,667 $ 3
Government Money Fund $ $ 847,526 $96
Treasury Money Fund $ $ 607,458 $ 0
Tax-Exempt Money Fund $ $1,807,345 $ 0
New York Tax-Exempt Money $ $ 0 $ 0
Fund
</TABLE>
Shareholder Organizations
- -------------------------
The Companies have entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
Retail Shares or Institutional Shares in consideration for a Fund's payment of
not more than the annual rate of 0.40% or
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<PAGE>
0.15%, respectively, of the average daily net assets of the Fund's Retail Shares
or Institutional Shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recordholder of Retail
Shares or Institutional Shares; (b) assisting in processing purchase, exchange
and redemption transactions; (c) transmitting and receiving funds in connection
with Customer orders to purchase, exchange or redeem Retail Shares or
Institutional Shares; (d) providing periodic statements showing a Customer's
account balances and confirmations of transactions by the Customer; (e)
providing tax and dividend information to shareholders as appropriate; (f)
transmitting proxy statements, annual reports, updated prospectuses and other
communications from the Companies to Customers; and (g) providing or arranging
for the provision of other related services. It is the responsibility of
Shareholder Organizations to advise Customers of any fees that they may charge
in connection with a Customer's investment. Until further notice, the Adviser
and Administrators have voluntarily agreed to waive fees payable by a Fund in an
aggregate amount equal to administrative service fees payable by that Fund.
The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the
Companies' arrangements with Shareholder Organizations are in effect, the
selection and nomination of the members of the Companies' Boards of Directors
who are not "interested persons" (as defined in the 1940 Act) of the Companies
will be committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the Company made payments
to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
<S> <C> <C>
Money Fund $ $
Government Money Fund $ $
Treasury Money Fund $ $
Tax-Exempt Money Fund $ $
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
<S> <C> <C>
New York Tax-Exempt Money Fund $ $
</TABLE>
For the fiscal year ended March 31, 1999, the Company made payments
to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
<S> <C> <C>
Money Fund $358,371 $358,333
Government Money Fund $184,360 $183,330
Treasury Money Fund $151,843 $151,843
Tax-Exempt Money Fund $827,107 $827,104
New York Tax-Exempt Money Fund $ 7,879 $ 7,879
</TABLE>
For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
<S> <C> <C>
Money Fund $231,371 $231,347
Government Money Fund $168,833 $168,139
Treasury Money Fund $ 82,614 $ 82,614
Tax-Exempt Money Fund $627,413 $627,412
New York Tax-Exempt Money Fund $ 0 $ 0
</TABLE>
Expenses
- --------
Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include taxes;
interest; fees (including fees paid to the
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<PAGE>
Companies' directors and officers who are not affiliated with the Distributor or
the Administrators); SEC fees; state securities qualifications fees; costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders; advisory, administration and administrative servicing fees;
charges of the custodian, transfer agent, and dividend disbursing agent; certain
insurance premiums; outside auditing and legal expenses; cost of independent
pricing services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions in
connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of the
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under the
Custodian Agreements, Chase has agreed to: (i) maintain a separate account or
accounts in the name of the Funds; (ii) make receipts and disbursements of money
on behalf of the Funds; (iii) collect and receive all income and other payments
and distributions on account of the Funds' portfolio securities; (iv) respond to
correspondence from securities brokers and others relating to its duties; (v)
maintain certain financial accounts and records; and (vi) make periodic reports
to each Company's Board of Directors concerning the Funds' operations. Chase
may, at its own expense, open and maintain custody accounts with respect to the
Funds with other banks or trust companies, provided that Chase shall remain
liable for the performance of all its custodial duties under the Custodian
Agreements, notwithstanding any delegation. Communications to the custodian
should be directed to Chase, Mutual Funds Service Division, 3 Chase MetroTech
Center, 8/th/ Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i) issue
and redeem Shares; (ii) address and mail all communications by the Funds to
their shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for its meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to each Company's Board of
Directors concerning the Funds' operations. For its transfer agency, dividend-
disbursing, and subaccounting services, U.S. Trust New York is entitled to
receive $15.00 per annum per account and subaccount. In addition, U.S. Trust New
York is entitled to be reimbursed for its out-of-pocket expenses for the cost of
forms, postage, processing purchase and redemption orders, handling of proxies,
and other similar expenses in connection with the above services. U.S. Trust New
York is located at 114 W. 47/th/ Street, New York, New York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreements, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Companies for any of its sub-transfer agency services.
-48-
<PAGE>
U.S. Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of all portfolio securities of each of the
Funds.
The Funds do not intend to seek profits from short-term trading. Their
annual portfolio turnover will be relatively high, but brokerage commissions are
not normally paid on money market instruments, and portfolio turnover is not
expected to have a material effect on the net income of the Funds.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere.
The Investment Advisory Agreements between the Companies and the
Adviser provide that, in executing portfolio transactions and selecting brokers
or dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems 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 and
whether such broker or dealer is selling shares of the Companies, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Companies'
Boards of Directors from time to time with respect to the extent and
continuation of the policy, to cause the Funds to pay a broker which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker for effecting the same transaction, provided that the
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser to the accounts as to which it exercises
investment discretion. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of stocks and their comparative earnings, or broad overviews of the stock
market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fees payable by the Funds. Such information may
be useful to the Adviser in serving the Funds
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<PAGE>
and other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Adviser in carrying
out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Adviser, the Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of the Funds and
another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Funds and such other
investment company or common trust fund. In some instances, this investment
procedure may adversely affect the price paid or received by the Funds or the
size of the position obtained by the Funds. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Funds with
those to be sold or purchased for other investment companies or common trust
funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 2000, the ________ Fund held one corporate bond issued by
______________ with a principal amount of $____________.
INDEPENDENT AUDITORS
--------------------
________________, independent auditors, __________________
serve as auditors of the Companies. The Funds' Financial Highlights included in
the Prospectus and the financial statements for the period ended March 31,
______ incorporated by reference in this Statement of Additional Information
have been audited by _________________ for the periods included in their reports
thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
One Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-
6996, is counsel to the Companies.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
- ---------
-50-
<PAGE>
The following supplements the tax information contained in the
Prospectus.
For federal income tax purposes, each Fund is treated as a separate
corporate entity, and has qualified and intends to continue to qualify as a
regulated investment company. Such qualification generally relieves a Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, such Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether or
not derived from interest on Municipal Securities) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders. Moreover, if a Fund were to fail to make
sufficient distributions in a year, the Fund would be subject to corporate
income taxes and/or excise taxes in respect of the shortfall or, if the
shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so either that they are not subject to backup withholding or that they are
"exempt recipients."
Each Tax-Exempt Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Exempt Funds would not be suitable for tax-exempt
institutions or for retirement plans qualified under Section 401 of the Code,
H.R. 10 plans and individual retirement accounts because such plans and accounts
are generally tax-exempt and, therefore, not only would not gain any additional
benefit from the Tax-Exempt Funds' dividends being tax-exempt, but such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. In addition, the Tax-Exempt Funds may not be appropriate investments for
entities which are "substantial users" of facilities financed by private
activity bonds or "related persons" thereof. "Substantial user" is defined under
the Treasury Regulations to include a non-exempt person who regularly uses a
part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenue derived by all users of such facilities (or
who occupies more than 5% of the total usable area of such facilities) or for
whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related
-51-
<PAGE>
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.
In order for the Tax-Exempt Funds to pay exempt-interest dividends for
any taxable year, at least 50% of the aggregate value of a Fund's portfolio must
consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, the Tax-Exempt
Funds will notify their shareholders of the portion of the dividends paid by
such Fund which constitutes an exempt-interest dividend with respect to such
taxable year. However, the aggregate amount of dividends so designated by the
Tax-Exempt Funds cannot exceed the excess of the amount of interest exempt from
tax under Section 103 of the Code received by the Tax-Exempt Funds during the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code. The percentage of total dividends paid by the Tax-Exempt
Funds with respect to any taxable year which qualifies as exempt-interest
dividends will be the same for all shareholders receiving dividends from the
Tax-Exempt Funds for such year.
The Tax-Exempt Funds intend to distribute to their shareholders any
investment company taxable income earned by such Fund for each taxable year. In
general, the Tax-Exempt Funds' investment company taxable income will be its
taxable income (including taxable interest and short-term capital gains) subject
to certain adjustments and excluding the excess of any net long-term capital
gain for the taxable year over the net short-term capital loss, if any, for such
year. Such distributions will be taxable to the shareholders as ordinary income
(whether paid in cash or additional shares).
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. You should consult your tax advisor for further information regarding
federal, state, local and/or foreign tax consequences relevant to your specific
situation. Shareholders may also be subject to state and local taxes on
distributions and redemptions. State income taxes may not apply, however, to the
portions of each Funds' distributions, if any, that are attributable to intent
on federal securities or interest on securities of the particular state or
localities within the state. For example, distributions from the New York Tax-
Exempt Money Fund will generally be exempt from federal, New York State and New
York City taxes.
YIELD INFORMATION
-----------------
Each Fund may advertise its seven-day yield which refers to the income
generated over a particular seven-day period identified in the advertisement by
an investment in the Fund. This income is annualized, i.e., the income during a
particular week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The Funds may also advertise their
"effective yields" which are calculated similarly but, when annualized, income
is assumed to be reinvested, thereby making the effective yields slightly higher
because of the compounding effect of the assumed reinvestment.
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<PAGE>
Yields will fluctuate and any quotation of yield should not be
considered as representative of a Fund's future performance. Since yields
fluctuate, yield data cannot necessarily be used to compare an investment in the
Funds with bank deposits, savings accounts and similar investment alternatives
which often provide an agreed or guaranteed fixed yield for a stated period of
time. Shareholders should remember that yield is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses, and market conditions. Any fees charged by Shareholder
Organizations with respect to accounts of Customers that have invested in Shares
will not be included in calculations of yield.
The standardized annualized seven-day yields for the Shares of the
Funds are computed separately by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the Fund
involved, having a balance of one Share at the beginning of the period, dividing
the net change in account value by the value of the account at the beginning of
the period to obtain the base period return, and multiplying the base period
return by (365/7). The net change in the value of an account in each of the
Funds includes the value of additional Shares purchased with dividends from the
original Share and dividends declared on both the original Share and any such
additional Shares, net of all fees that are charged to all Shareholder accounts
and to the particular series of Shares in proportion to the length of the base
period, other than nonrecurring account or any sales charges. For any account
fees that vary with the size of the account, the amount of fees charged is
computed with respect to the Fund's mean (or median) account size. The capital
changes to be excluded from the calculation of the net change in account value
are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. In addition, each Fund may use effective compound
yield quotations for its Shares computed by adding 1 to the unannualized base
period return (calculated as described above), raising the sums to a power equal
to 365 divided by 7, and subtracting 1 from the results.
From time to time, in advertisements, sales literature or in reports
to shareholders, the yields of each Money Market Fund's Shares may be quoted and
compared to those of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, the yield of such a Fund's
Shares may be compared to the Donoghue's Money Fund average, which is an average
compiled by Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
The yields of the Taxable Funds may also be compared to the average yields
reported by the Bank Rate Monitor for money market deposit accounts offered by
the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas. Advertisements, sales literature or reports to
shareholders may from time to time also include a discussion and analysis of
each Fund's performance, including without limitation, those factors, strategies
and techniques that, together with market conditions and events, materially
affected each Fund's performance.
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 publications of a local or regional nature, may
also be used in comparing the Funds' yields.
The current yields for the Funds' Shares may be obtained by calling
(800) 446-1012. For the seven-day period ended March 31, 2000, the annualized
yields for Retail Shares
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<PAGE>
of the Money Fund, Government Money Fund, Treasury Money Fund, Tax-Exempt Money
Fund and New York Tax-Exempt Money Fund were ____%, ____%, ____%, ____% and
____%, respectively, and the effective yields for Retail Shares of such
respective Funds were ____%, ____%, ____%, ____% and ____%.
The "tax-equivalent" yield of the Tax-Exempt Money Fund is computed
by: (a) dividing the portion of the yield (calculated as above) that is exempt
from federal income tax by one minus a stated federal income tax rate and (b)
adding that figure to that portion, if any of the yield that is not exempt from
federal income tax. Tax-equivalent yields assume the payment of federal income
taxes at a rate of 31%.
The "tax-equivalent" yield of the New York Tax-Exempt Money Fund is
computed by: (a) dividing the portion of the yield (calculated as above) that is
exempt from both federal and New York State income taxes by one minus a stated
combined federal and New York State income tax rate; (b) dividing the portion of
the yield (calculated as above) that is exempt from federal income tax only by
one minus a stated federal income tax rate; and (c) adding the figures resulting
from (a) and (b) above to that portion, if any, of the yield that is not exempt
from federal income tax. Tax-equivalent yields assume a federal income tax rate
of 31%, a New York State and New York City marginal income tax rate of 10.21%
and an overall tax rate taking into account the federal tax deduction for state
and local taxes paid of 38.04%.
Based on the foregoing calculation, the annualized tax-equivalent
yield of the Retail Shares of the Tax-Exempt Money Fund and the New York Tax-
Exempt Money Fund for the seven-day period ended March 31, ____ were ____% and
____%.
CODE OF ETHICS
The Funds, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics that allow personnel subject to the codes to invest
in securities, including securities that may be purchased or held by the Funds.
MISCELLANEOUS
As used herein, "assets belonging to a Fund" means the consideration
received upon the issuance of Shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company involved not belonging to a particular portfolio of that Company. In
determining the net asset value of a Fund's Shares, assets belonging to the Fund
are charged with the direct liabilities in respect of that Fund and with a share
of the general liabilities of the Company involved which are normally allocated
in proportion to the relative asset values of the Company's portfolios at the
time of allocation. Subject to the provisions of the Companies' Charters,
determinations by the Boards of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to a
particular Fund, are conclusive.
As of May 18, 2000, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding Shares as agent or custodian for
their customers, but did not
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<PAGE>
own such shares beneficially because they did not have voting or investment
discretion with respect to such Retail Shares.
As of May 18, 2000, the name, address and percentage ownership of each
person, in addition to U.S. Trust and its affiliates, that owned beneficially or
of record 5% or more of the outstanding shares of a Fund were as follows: NEW
YORK TAX-EXEMPT MONEY FUND: Sara Wilford, c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10036, 6.61%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, _____ (the
"_____ Annual Reports") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the _____ Annual
Reports are incorporated by reference herein. The financial statements included
in the _______ Annual Reports for the Funds have been audited by the Companies'
independent auditors, _____________, whose reports thereon also appear in the
_____ Annual Reports and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the ______ Annual Reports may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
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<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion of
the creditworthiness of an obligor with respect to financial obligations having
an original maturity of no more than 365 days. The following summarizes the
rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower
A-1
<PAGE>
capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific issues.
Foreign currency issuer ratings are also distinguished from local currency
issuer ratings to identify those instances where sovereign risks make them
different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
A-2
<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates uncertain capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic
conditions.
"C" - Securities possess high default risk. This designation indicates
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
A-3
<PAGE>
Thomson Financial BankWatch short-term ratings assess the likelihood
of an untimely payment of principal and interest of debt instruments with
original maturities of one year or less. The following summarizes the ratings
used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as non-
investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
A-4
<PAGE>
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on
this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"c" - The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p - The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing
A-5
<PAGE>
credit quality subsequent to completion of the project, makes no comment on the
likelihood of or the risk of default upon failure of such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and interest-
only and principal-only mortgage securities. The absence of an 'r' symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds 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 risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate
A-6
<PAGE>
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
A-7
<PAGE>
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
A-8
<PAGE>
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% -
90%, and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
'NR' indicates the Fitch IBCA does not rate the issuer or issue in
question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount
of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Alert: Ratings are place on Rating Alert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Alert is typically
resolved over a relatively short period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
A-9
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could negatively affect the payment of interest and principal on a
timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
A-10
<PAGE>
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
EXCELSIOR FUNDS, INC.
Blended Equity Fund
Value and Restructuring Fund
Small Cap Fund
Large Cap Growth Fund
Technology Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the Blended Equity, Value
and Restructuring, Small Cap, Large Cap Growth and Technology Funds
(individually, a "Fund" and collectively, the "Funds") of Excelsior Funds, Inc.
dated August 1, 2000 (the "Prospectus"). A copy of the Prospectus may be
obtained by writing Excelsior Funds, Inc. c/o Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.
The audited financial statements and related report of ________________,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, ______ are incorporated herein by reference
in the section entitled "Financial Statements." No other parts of the annual
report are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY........................................... 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS.......................... 1
Additional Investment Policies.................................. 1
Additional Information on Portfolio Instruments................. 2
INVESTMENT LIMITATIONS............................................... 13
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................... 19
Distributor..................................................... 19
Purchase of Shares.............................................. 19
Redemption Procedures........................................... 20
Other Redemption Information.................................... 21
INVESTOR PROGRAMS.................................................... 22
Systematic Withdrawal Plan...................................... 22
Exchange Privilege.............................................. 23
Retirement Plans................................................ 23
Automatic Investment Program.................................... 24
Additional Information.......................................... 24
DESCRIPTION OF CAPITAL STOCK......................................... 25
MANAGEMENT OF THE FUNDS.............................................. 27
Directors and Officers.......................................... 27
Investment Advisory and Administration Agreements............... 32
Shareholder Organizations....................................... 36
Expenses........................................................ 38
Custodian and Transfer Agent.................................... 39
PORTFOLIO TRANSACTIONS............................................... 40
PORTFOLIO VALUATION.................................................. 43
INDEPENDENT AUDITORS................................................. 44
COUNSEL.............................................................. 44
ADDITIONAL INFORMATION CONCERNING TAXES.............................. 44
PERFORMANCE INFORMATION.............................................. 45
CODE OF ETHICS....................................................... 48
MISCELLANEOUS........................................................ 48
FINANCIAL STATEMENTS................................................. 49
APPENDIX A........................................................... A-1
</TABLE>
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. Each Fund is a separate series of the Company and is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Company was organized as a Maryland corporation on August
2, 1984. Prior to December 28, 1995, the Company was known as "UST Master Funds,
Inc." Each of the Funds (except the Technology Fund) offer two share classes,
Shares which are discussed in this Statement of Additional Information ("SAI")
and Advisory Shares which are discussed in a separate SAI. The Technology Fund
offers only Shares. Prior to August 1, 1997, the Blended Equity Fund, Value and
Restructuring Fund and Small Cap Fund were known as the Equity Fund, Business
and Industrial Restructuring Fund and Early Life Cycle Fund, respectively.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------
The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the Blended Equity, Value and
Restructuring and Small Cap Funds may not be changed without the vote of the
holders of a majority of its outstanding shares (as defined below). The
investment objective of the Large Cap Growth and Technology Funds may be changed
without shareholder approval. Except as expressly noted below, each Fund's
investment policies may be changed without shareholder approval.
Additional Investment Policies
- ------------------------------
Under normal market and economic conditions, each of the Blended
Equity, Value and Restructuring, Small Cap and Large Cap Growth Funds will
invest at least 65% of its total assets in common stock, preferred stock and
securities convertible into common stock. The Technology Fund will invest at
least 65% of its total assets in equity securities of technology companies.
Technology companies are those companies that are expected to benefit from the
development, advancement and use of technology. These companies may be in a
variety of industries, and may include computer hardware, software, electronic
components and systems, telecommunications, internet, biotechnology, media and
information services companies or other companies that use technology
extensively in the development of new or improved products or processes.
Normally, up to 35% of each Fund's total assets may be invested in other
securities and instruments including, e.g., other investment-grade debt
securities (i.e., debt obligations classified within the four highest ratings of
a nationally recognized statistical rating organization such as Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Services
("S&P") or, if unrated, determined by the Adviser to be of comparable quality),
warrants, options and futures instruments as described in more detail below.
During temporary defensive periods or when the Adviser believes that suitable
stocks or convertible securities are unavailable, each Fund may hold cash and/or
invest some or all of its assets in U.S. government securities, high-quality
money market instruments and repurchase agreements collateralized by the
foregoing obligations.
<PAGE>
Portfolio holdings will include equity securities of companies having
capitalizations of varying amounts, and the Funds may invest in the securities
of high growth, small companies when the Adviser expects earnings and the price
of the securities to grow at an above-average rate. The Small Cap Fund
emphasizes such companies. Certain securities owned by the Funds may be traded
only in the over-the-counter market or on a regional securities exchange, may be
listed only in the quotation service commonly known as the "pink sheets," and
may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, there may be a greater fluctuation in the
value of a Fund's shares, and a Fund may be required, in order to satisfy
redemption requests or for other reasons, to sell these securities at a discount
from market prices, to sell during periods when such disposition is not
desirable, or to make many small sales over a period of time.
The Funds may invest in the securities of foreign issuers directly or
indirectly through sponsored and unsponsored American Depository Receipts
("ADRs"). ADRs represent receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities of foreign issuers.
Investments in unsponsored ADRs involve additional risk because financial
information based on generally accepted accounting principles ("GAAP") may not
be available for the foreign issuers of the underlying securities. ADRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. The Funds may also enter into foreign currency
exchange transactions for hedging purposes.
Additional Information on Portfolio Instruments
- -----------------------------------------------
Options
-------
The Value and Restructuring, Small Cap Large Cap Growth and Technology
Funds may purchase put and call options listed on a national securities exchange
and issued by the Options Clearing Corporation. Such purchases would be in an
amount not exceeding 5% of each such Fund's net assets. Such options may relate
to particular securities or to various stock and bond indices. Purchase of
options is a highly specialized activity which entails greater than ordinary
investment risks, including a substantial risk of a complete loss of the amounts
paid as premiums to the writer of the options. Regardless of how much the market
price of the underlying security increases or decreases, the option buyer's risk
is limited to the amount of the original investment for the purchase of the
option. However, options may be more volatile than the underlying securities,
and therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities. A listed
call option gives the purchaser of the option the right to buy from a clearing
corporation, and the writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A listed put option gives the purchaser
the right to sell to a clearing corporation the underlying security at the
stated exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. Put and call options purchased
by the Value and Restructuring, Small Cap Large Cap Growth and Technology Funds
will be
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valued at the last sale price or, in the absence of such a price, at the mean
between bid and asked prices.
Each Fund may engage in writing covered call options (options on
securities owned by the particular Fund) and enter into closing purchase
transactions with respect to such options. Such options must be listed on a
national securities exchange and issued by the Options Clearing Corporation. The
aggregate value of the securities subject to options written by each Fund may
not exceed 25% of the value of its net assets. By writing a covered call option,
a Fund forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price except insofar as the premium
represents such a profit, and it will not be able to sell the underlying
security until the option expires or is exercised or the Fund effects a closing
purchase transaction by purchasing an option of the same series.
When a Fund writes a covered call option, it may terminate its
obligation to sell the underlying security prior to the expiration date of the
option by executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the writer will have
incurred a loss on the transaction. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered option writer, unable to effect a closing
purchase transaction, will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer in such circumstances will be subject to the risk of
market decline in the underlying security during such period. A Fund will write
an option on a particular security only if the Adviser believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Fund to make a closing purchase transaction in order to close
out its position.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the average of the
closing bid and asked prices. If an option expires on the stipulated expiration
date, or if the Fund involved enters into a closing purchase transaction, the
Fund will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold), and the deferred
credit related to such option will be eliminated. If an option is exercised, the
Fund involved may deliver the underlying security from its portfolio or purchase
the underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received, and the Fund
involved will realize a gain or loss. Premiums from expired call options written
by the Funds and net gains from closing purchase transactions are
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<PAGE>
treated as short-term capital gains for Federal income tax purposes, and losses
on closing purchase transactions are treated as short-term capital losses. The
use of covered call options is not a primary investment technique of the Funds
and such options will normally be written on underlying securities as to which
the Adviser does not anticipate significant short-term capital appreciation.
Repurchase Agreements
---------------------
Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds'
custodian (or sub-custodian) or in the Federal Reserve/Treasury book-entry
system. The seller under a repurchase agreement will be required to maintain the
value of the securities which are subject to the agreement and held by a Fund at
not less than the repurchase price. Default or bankruptcy of the seller would,
however, expose a Fund to possible delay in connection with the disposition of
the underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
Repurchase agreements are considered loans by a Fund under the 1940 Act.
Futures Contracts and Related Options
-------------------------------------
Each Fund may invest in futures contracts and options thereon. They
may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on recognized exchanges or
in other established financial markets. A futures contract on foreign currency
creates a binding obligation on one party to deliver, and a corresponding
obligation on another party to accept delivery of, a stated quantity of a
foreign currency for an amount fixed in U.S. dollars. Foreign currency futures,
which operate in a manner similar to interest rate futures contracts, may be
used by the Funds to hedge against exposure to fluctuations in exchange rates
between the U.S. dollar and other currencies arising from multinational
transactions.
Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with a Fund's securities investments. The Funds
will engage in futures transactions only to the extent permitted by the
Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange
Commission ("SEC"). When investing in futures contracts, the Funds must satisfy
certain asset segregation requirements to ensure that the use of futures is
unleveraged. When a Fund takes a long position in a futures contract, it must
maintain
-4-
<PAGE>
a segregated account containing liquid assets equal to the purchase price of the
contract, less any margin or deposit. When a Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established. Asset segregation
requirements are not applicable when a Fund "covers" an options or futures
position generally by entering into an offsetting position. Each Fund will limit
its hedging transactions in futures contracts and related options so that,
immediately after any such transaction, the aggregate initial margin that is
required to be posted by the Fund under the rules of the exchange on which the
futures contract (or futures option) is traded, plus any premiums paid by the
Fund on its open futures options positions, does not exceed 5% of the Fund's
total assets, after taking into account any unrealized profits and unrealized
losses on the Fund's open contracts (and excluding the amount that a futures
option is "in-the-money" at the time of purchase). An option to buy a futures
contract is "in-the-money" if the then-current purchase price of the underlying
futures contract exceeds the exercise or strike price; an option to sell a
futures contract is "in-the-money" if the exercise or strike price exceeds the
then-current purchase price of the contract that is the subject of the option.
In addition, the use of futures contracts is further restricted to the extent
that no more than 10% of a Fund's total assets may be hedged.
Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge.
Transactions in futures as a hedging device may subject a Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts (or options) and movements in the price of the instruments
being hedged. In addition, investments in futures may subject a Fund to losses
due to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract (or option) at any particular time. Consequently, a Fund may realize a
loss on a futures transaction that is not offset by a favorable movement in the
price of securities which it holds or intends to purchase or may be unable to
close a futures position in the event of adverse price movements. In addition,
in some situations, if a Fund has insufficient cash, it may have to sell
securities to meet daily
-5-
<PAGE>
variation margin requirements at a time when it may be disadvantageous to do so.
Such sales of securities may be, but will not necessarily be, at increased
prices which reflect the rising market.
As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions involves the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom such
Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Options on Futures Contracts
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
-6-
<PAGE>
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the instruments
being hedged, an option may or may not be less risky than ownership of the
futures contract or such instruments. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). Although permitted by
their fundamental investment policies, the Funds do not currently intend to
write futures options, and will not do so in the future absent any necessary
regulatory approvals.
When-Issued and Forward Transactions
------------------------------------
Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described above, its liquidity
and ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are
-7-
<PAGE>
delivered to the Fund on the settlement date. In these cases, the Fund may
realize a taxable capital gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Forward Currency Transactions
-----------------------------
Each Fund will conduct its currency exchange transactions either on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange markets,
or by entering into forward currency contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. In this respect, forward currency contracts are
similar to foreign currency futures contracts; however, unlike futures contracts
which are traded on recognized commodities exchanges, forward currency
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. Also, forward
currency contracts usually involve delivery of the currency involved instead of
cash payment as in the case of futures contracts.
A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose of
transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Funds will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
a Fund's assets, but will be employed as necessary to correspond to particular
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation
-8-
<PAGE>
requirements are not applicable when a Fund "covers" a forward currency position
generally by entering into an offsetting position.
The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
Real Estate Investment Trusts
-----------------------------
Each Fund, other than the Technology Fund, may invest in equity real
estate investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may
subject these Funds to certain risks. REITs may be affected by changes in the
value of the underlying property owned by the trust. REITs are dependent upon
specialized management skill, may not be diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation and the possibility of
failing to qualify for the beneficial tax treatment available to REITs under the
Internal Revenue Code of 1986, as amended (the "Code"), and to maintain
exemption from the 1940 Act. As a shareholder in a REIT, each of these Funds
would bear, along with other shareholders, its pro rata portion of the REIT's
operating expenses. These expenses would be in addition to the advisory and
other expenses these Funds bear directly in connection with its own
operations.
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<PAGE>
Securities Lending
------------------
To increase return on its portfolio securities, each Fund may lend its
portfolio securities to broker/dealers pursuant to agreements requiring the
loans to be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. Collateral for such loans may
include cash, securities of the U.S. government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total assets.
When a Fund lends its securities, it continues to receive interest or dividends
on the securities lent and may simultaneously earn interest on the investment of
the cash loan collateral, which will be invested in readily marketable, high-
quality, short-term obligations. Although voting rights, or rights to consent,
attendant to lent securities pass to the borrower, such loans may be called at
any time and will be called so that the securities may be voted by a Fund if a
material event affecting the investment is to occur.
There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.
Money Market Instruments
------------------------
All Funds may invest in "money market instruments," which include,
among other things, bank obligations, commercial paper and corporate bonds with
remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations also
include U.S. dollar-denominated obligations of foreign branches of U.S. banks
and obligations of domestic branches of foreign banks. Investments in bank
obligations of foreign branches of domestic financial institutions or of
domestic branches of foreign banks are limited so that no more than 5% of the
value of a Fund's total assets may be invested in any one branch, and no more
than 20% of a particular Fund's total assets at the time of purchase may be
invested in the aggregate in such obligations (see investment limitation No.
22 below under "Investment Limitations." With respect to the Value and
Restructuring, Small Cap, Large Cap and Technology Funds, this limitation may be
changed by the Company's Board of Directors without shareholder approval).
Investments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at the time of purchase.
Investments by the Funds in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire
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<PAGE>
unrated commercial paper that is determined by the Adviser at the time of
purchase to be of comparable quality to rated instruments that may be acquired
by the particular Fund.
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by a Fund, the Fund may, from time to time as specified in
the instrument, demand payment of the principal of the instrument or may resell
the instrument to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods that the Fund is
not entitled to exercise its demand rights, and the Fund could, for this or
other reasons, suffer a loss with respect to such instrument.
Government Obligations
----------------------
All Funds may invest in U.S. government obligations, including U.S.
Treasury Bills and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, the
Farmers Home Administration, the Export-Import Bank of the United States, the
Small Business Administration, the Government National Mortgage Association, the
Federal National Mortgage Association, the General Services Administration, the
Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks and the Maritime Administration.
Debt Securities and Convertible Securities
------------------------------------------
The Technology Fund may invest in investment grade debt and
convertible securities of domestic and foreign issuers. The convertible
securities in which the Technology Fund may invest include any debt securities
or preferred stock which may be converted into common stock or which carry the
right to purchase common stock. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of
time. Debt obligations rated in the lowest of the top four investment grade
ratings ("Baa" by Moody's and "BBB" by S&P) are considered to have some
speculative characteristics and may be more sensitive to adverse economic change
than higher rated securities. The Technology Fund will sell in an orderly
fashion as soon as possible any convertible and non-convertible debt securities
it holds if they are downgraded below "Baa" by Moody's or below "BBB" by S&P.
Foreign debt and convertible securities are generally unrated.
Investment Company Securities
-----------------------------
Each Fund may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly
-11-
<PAGE>
bear the expenses of the Fund and the other investment company, some or all of
which would be duplicative. Such securities will be acquired by each Fund within
the limits prescribed by the 1940 Act, which include, subject to certain
exceptions, a prohibition against a Fund investing more than 10% of the value of
its total assets in such securities.
Each Fund may invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The SEC views reverse repurchase agreements as a form of
borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price of those securities.
-12-
<PAGE>
Illiquid Securities
-------------------
No Fund will knowingly invest more than 10% (15%, with respect to the
Large Cap Growth and Technology Funds) of the value of its net assets in
securities that are illiquid. A security will be considered illiquid if it may
not be disposed of within seven days at approximately the value at which the
particular Fund has valued the security. Each Fund may purchase securities which
are not registered under the Securities Act of 1933, as amended (the "Act"), but
which can be sold to "qualified institutional buyers" in accordance with Rule
144A under the Act. Any such security will not be considered illiquid so long as
it is determined by the Adviser, acting under guidelines approved and monitored
by the Board, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers are no longer
interested in purchasing these restricted securities.
Portfolio Turnover
------------------
Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
the investment objective of the particular Fund. Portfolio investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. The annual portfolio turnover rate of the Technology Fund is not
expected to exceed 100%. A rate of 100% indicates that the equivalent of all of
the Fund's assets have been sold and reinvested in a calendar year. A high rate
of portfolio turnover may involve correspondingly greater brokerage commission
expenses and other transaction costs, which must be borne directly by a Fund and
ultimately by its shareholders. High portfolio turnover may result in the
realization of substantial net capital gains. To the extent net short-term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes. (See "Additional
Information Concerning Taxes.")
Investment Limitations
- ----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of the Company or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Company or such Fund, or (b) 67% or more of the shares of the
Company or such Fund present at a meeting if more than 50% of the outstanding
shares of the Company or such Fund are represented at the meeting in person or
by proxy. Investment limitations which are "operating policies" with respect to
a Fund may be changed by the Company's Board of Directors without shareholder
approval.
-13-
<PAGE>
The following investment limitations are fundamental with respect to
each of the Funds. Each Fund may not:
1. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) each
of the Blended Equity, Value and Restructuring and Small Cap Funds may lend
portfolio securities in an amount not exceeding 30% of its total assets, and
(iii) the Large Cap Growth and Technology Funds may lend portfolio securities
in accordance with their investment objective and policies; and
2. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (i) with respect to the Blended Equity Fund,
there is no limitation with respect to securities issued or guaranteed by the
U.S. government or domestic bank obligations, (ii) with respect to the Value and
Restructuring and Small Cap Funds, there is no limitation with respect to
securities issued or guaranteed by the U.S. government, (iii) with respect to
the Large Cap Growth and Technology Funds, there is no limitation with respect
to securities issued or guaranteed by the U.S. government, any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and
repurchase agreements secured by such securities, (iv) with respect to the
Technology Fund, the Fund will concentrate its investments in the securities of
technology companies; and (v) neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for purposes of
this policy.
The following investment limitations are fundamental with respect to
each of the Blended Equity, Value and Restructuring and Small Cap Funds. Each
such Fund may not:
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
4. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate;
5. Purchase securities of any one issuer, other than U.S. government
obligations, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that up
to 25% of the value of its total assets may be invested without regard to this
5% limitation;
6. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its
-14-
<PAGE>
total assets at the time of such borrowing. (This borrowing provision is
included solely to facilitate the orderly sale of portfolio securities to
accommodate abnormally heavy redemption requests and is not for leverage
purposes.) A Fund will not purchase portfolio securities while borrowings in
excess of 5% of its total assets are outstanding. Optioned stock held in escrow
is not deemed to be a pledge; and
7. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitation contained in the Prospectus might
be considered to be the issuance of a senior security.
The following investment limitations are fundamental with respect to
the Large Cap Growth Fund. The Fund may not:
8. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act. Optioned stock held in escrow is not
deemed to be a pledge;
9. Purchase securities of any one issuer, other than securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
or other investment companies if, immediately after such purchase, more than 5%
of the value of its total assets would be invested in the securities of such
issuer, except that up to 25% of the value of its total assets may be invested
without regard to this 5% limitation;
10. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
its investment objective, policies and limitations may be deemed to be
underwriting;
11. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;
12. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and
13. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that the Fund may: (a) purchase publicly traded securities of
companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.
-15-
<PAGE>
The following investment limitations are fundamental with respect to
the Technology Fund. The Fund may not:
14. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act. Optioned stock held in escrow is not
deemed to be a pledge.
15. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
its investment objective, policies and limitations may be deemed to be
underwriting;
16. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;
17. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and
18. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that the Fund may: (a) purchase publicly traded securities of
companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.
The following investment limitations are fundamental with respect to
the Blended Equity and Technology Funds, but are operating policies with
respect to the Value and Restructuring, Small Cap and Large Cap Growth Funds.
No Fund may:
19. Purchase securities on margin, make short sales of securities, or
maintain a short position;
20. Invest in companies for the purpose of exercising management or
control; and
-16-
<PAGE>
21. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
The following investment limitations are fundamental with respect to
the Blended Equity Fund. The Fund may not:
22. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of its total assets would be invested in
obligations of any one foreign branch of the financial institution or domestic
branch of a foreign bank; or (ii) more than 20% of its total assets would be
invested in foreign branches of financial institutions or in domestic branches
of foreign banks;
23. Knowingly invest more than 10% of the value of its total assets
in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available;
24. Invest in or sell put options, call options, straddles, spreads,
or any combination thereof; provided, however, that the Fund may write covered
call options with respect to its portfolio securities that are traded on a
national securities exchange, and may enter into closing purchase transactions
with respect to such options if, at the time of the writing of such option, the
aggregate value of the securities subject to the options written by the Fund
does not exceed 25% of the value of its total assets;
25. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years; and
26. Purchase or sell commodities futures contracts or invest in oil,
gas, or other mineral exploration or development programs; provided, however,
that this shall not prohibit the Fund from purchasing publicly traded securities
of companies engaging in whole or in part in such activities.
The following investment limitation is fundamental with respect to the
Value and Restructuring and Small Cap Funds. The Value and Restructuring and
Small Cap Funds may not:
27. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that (i) this
-17-
<PAGE>
shall not prohibit either Fund from purchasing publicly traded securities of
companies engaging in whole or in part in such activities or from investing in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with their investment objectives and policies, and
(ii) each Fund may enter into futures contracts and futures options.
* * *
In addition to the investment limitations described above, no Fund may
invest in the securities of any single issuer if, as a result, the Fund holds
more than 10% of the outstanding voting securities of such issuer.
The Value and Restructuring, Small Cap, Large Cap Growth and
Technology Funds may not invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks if immediately after such
purchase (i) more than 5% of the value of their respective total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of their respective
total assets would be invested in foreign branches of financial institutions or
in domestic branches of foreign banks. In addition, the Large Cap Growth and
Technology Funds will not purchase portfolio securities while borrowings in
excess of 5% of their total assets are outstanding. These investment policies
may be changed by the Company's Board of Directors without shareholder approval.
The Blended Equity Fund will not invest more than 25% of the value of
its total assets in domestic bank obligations.
Each Fund currently intends to limit its investments in warrants so
that, valued at the lower of cost or market value, they do not exceed 5% of the
Fund's net assets. For the purpose of this limitation, warrants acquired by a
Fund in units or attached to securities will be deemed to be without value. Each
Fund also intends to refrain from entering into arbitrage transactions.
For the purpose of Investment Limitation Nos. 4 and 16, the
prohibition of purchases of real estate includes acquisition of limited
partnership interests in partnerships formed with a view toward investing in
real estate, but does not prohibit purchases of shares in real estate investment
trusts.
The Blended Equity Fund may not purchase or sell commodities except as
provided in Investment Limitation No. 26 above.
In addition to the above investment limitations, the Technology Fund
currently intends to refrain from entering into arbritage transactions.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation.
-18-
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Company's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Purchase of Shares
Shares of the Funds are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the
-19-
<PAGE>
Shareholder Organization and its Customer in shares selected by the Customer.
Investors purchasing shares may include officers, directors, or employees of the
particular Shareholder Organization.
Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Company. A Shareholder
Organization may elect to hold of record shares for its Customers and to record
beneficial ownership of shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility to
transmit to the Distributor all purchase requests for its Customers and to
transmit, on a timely basis, payment for such requests to Chase Global Funds
Services Company ("CGFSC"), the Funds' sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases (and redemptions) will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a
Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization continues
to place its Customers' purchase (and redemption) requests with the Funds, CGFSC
will send confirmations of such transactions and periodic account statements
directly to the shareholders of record. Shares in the Funds bear the expense of
fees payable to Shareholder Organizations for such services. See "Shareholder
Organizations."
Redemption Procedures
- ---------------------
Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Company, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).
-20-
<PAGE>
As discussed in the Prospectus, a redemption request for an amount
in excess of $50,000 per account, or for any amount if the proceeds are to be
sent elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until CGFSC receives all
required documents in good order. Payment for shares redeemed will ordinarily be
made by mail within five Business Days after receipt by CGFSC of the redemption
request in good order. Questions with respect to the proper form for redemption
requests should be directed to CGFSC at (800) 446-1012 (from overseas, call
(617) 557-8280).
Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
- ----------------------------
The Company may suspend the right of redemption or postpone the date
of payment for shares for more than seven days during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
The Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the
-21-
<PAGE>
Company and valued in the same way as they would be valued for purposes of
computing a Fund's net asset value (a "redemption in kind"). If payment is made
in securities, a shareholder may incur transaction costs in converting these
securities into cash. The Company has filed a notice of election with the SEC
under Rule 18f-1 of the 1940 Act. Therefore, a Fund is obligated to redeem its
shares solely in cash up to the lesser of $250,000 or 1% of its net asset value
during any 90-day period for any one shareholder of the Fund.
Under certain circumstances, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a bona fide
---- ----
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.
-22-
<PAGE>
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Company or Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund" and,
collectively with the Company, the "Companies") or for shares of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.
Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
- ----------------
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):
. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
. Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit
themselves and their employees; and
-23-
<PAGE>
. Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase
shares of the Funds pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.
Automatic Investment Program
- ----------------------------
The Automatic Investment Program permits Investors to purchase shares
(minimum of $50 per Fund per transaction) at regular intervals selected by the
Investor. The minimum initial investment for an Automatic Investment Program
account is $50 per Fund. Provided the Investor's financial institution allows
automatic withdrawals, shares are purchased by transferring funds from an
Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.
The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, dollar cost averaging should
usually be followed on a sustained, consistent basis. Investors should be
aware, however, that shares bought using dollar cost averaging are purchased
without regard to their price on the day of investment or to market trends. In
addition, while Investors may find dollar cost averaging to be beneficial, it
will not prevent a loss if an Investor ultimately redeems his shares at a price
which is lower than their purchase price. The Company may modify or terminate
this privilege at any time or charge a service fee, although no such fee
currently is contemplated. An Investor may also implement the dollar cost
averaging method on his own initiative or through other entities.
Additional Information
- ----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
-24-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
----------------------------
The Company's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of common stock, $.001 par value
per share, and to classify or reclassify any unissued shares of the Company into
one or more classes or series by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into 46 series of shares representing interests in 18 investment
portfolios.
Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the Company's Board of Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.
Shareholders of the Company are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of the Company voting
without regard to class.
The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include
-25-
<PAGE>
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of the Fund involved to be redeemed at a price which is equal
to their net asset value and which may be paid in cash or by distribution of the
securities or other consideration received from the sale and conveyance; (b)
sell and convert a Fund's assets into money and, in connection therewith, to
cause all outstanding shares of the Fund involved to be redeemed at their net
asset value; or (c) combine the assets belonging to a Fund with the assets
belonging to another portfolio of the Company, if the Board of Directors
reasonably determines that such combination will not have a material adverse
effect on shareholders of any portfolio participating in such combination, and,
in connection therewith, to cause all outstanding shares of the Fund involved to
be redeemed at their net asset value or converted into shares of another class
of the Company's common stock at net asset value. The exercise of such authority
by the Board of Directors will be subject to the provisions of the 1940 Act, and
the Board of Directors will not take any action described in this paragraph
unless the proposed action has been disclosed in writing to the particular
Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.
Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.
-26-
<PAGE>
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The business and affairs of the Funds are managed under the direction
of the Company's Board of Directors. The directors and executive officers of
the Company, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Retired; Chairman of the Boards (since 1997)
238 June Road Board, President and President, Treasurer and Director of the
Stamford, CT 06903 and Treasurer Company and Excelsior Tax-Exempt Funds, Inc.
Age: 68 (since 1995); Chairman of the Boards (since
1997), President, Treasurer and Trustee (since
1995) of Excelsior Institutional Trust;
Trustee of Excelsior Funds (from 1995 to 1999);
Vice Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990 until
September 1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).
Donald L. Campbell Director Retired; Director of the Company and Excelsior
333 East 69th Street Tax-Exempt Funds, Inc. (since 1984); Director
Apt. 10-H of UST Master Variable Series, Inc. (from 1994
New York, NY 10021 to June 1997); and Trustee of Excelsior
Age: 73 Institutional Trust (since 1995).
</TABLE>
______________________________
1. This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-27-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ---------- ------------------
<S> <C> <C>
Rodman L. Drake Director Director of the Company and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Funds, Inc. (since 1996); Trustee
1251 Avenue of the Americas of Excelsior Institutional Trust (since 1994);
9/th/ Floor Trustee of Excelsior Funds (from 1994 to 1999);
New York, NY 10020 Director, Parsons Brinkerhoff, Inc.
Age: 56 (engineering firm) (since 1995); President,
Continuation Investments Group, Inc. (since
1997); President, Mandrake Group (investment
and consulting firm) (1994-1997); Chairman,
MetroCash Card International Inc.
(1999-present); Director, Hotelivision, Inc.
(1999-Present); Director, Alliance Group
Services, Inc. (1998-Present); Director,
Hyperion Total Return Fund, Inc. and three
other funds for which Hyperion Capital
Management, Inc. serves as investment adviser
(since 1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993 to 1996);
Director, The Latin America Smaller Companies
Fund, Inc. (1993-1998); Member of Advisory
Board, Argentina Private Equity Fund L.P. (from
1992 to 1996) and Garantia L.P. (Brazil) (from
1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of the Company and Excelsior
913 Franklin Lake Road Tax-Exempt Fund (since 1984); Director of UST
Franklin Lakes, NJ 07417 Master Variable Series, Inc. (from 1994 to June
Age: 74 1997); and Trustee of Excelsior Institutional
Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of the Company and Excelsior
2320 Cumberland Road Tax-Exempt Funds, Inc. (since 1986); Director
Charlottesville, VA 22901-7726 of UST Master Variable Series, Inc. (from 1994
Age: 79 to June 1997); Trustee of Excelsior
Institutional Trust (since 1995); Director,
Deutsche Bank Financial, Inc. (since 1989);
Director, The Harbus Corporation (since 1951);
and Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1988).
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Jonathan Piel Director Director of the Company and Excelsior
558 E. 87th Street Tax-Exempt Funds, Inc. (since 1996); Trustee
New York, NY 10128 of Excelsior Institutional Trust (since 1994);
Age: 60 Trustee of Excelsior Funds (from 1994 to 1999);
Vice President and Editor, Scientific American,
Inc. (from 1986 to 1994); Director, Group for
The South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts Institute
of Technology (since 1984).
Robert A. Robinson Director Director of the Company and Excelsior
Church Pension Group Tax-Exempt Funds, Inc. (since 1987); Director
445 Fifth Avenue of UST Master Variable Series, Inc. (from
New York, NY 10016 1994 to June 1997); Trustee of Excelsior
Age: 73 Institutional Trust (since 1995); President
Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee,
H.B. and F.H. Bugher Foundation and Director of
its wholly owned subsidiaries -- Rosiclear Lead
and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director, Morehouse
Publishing Co. (1974-1998); Trustee, HSBC Funds
Trust and HSBC Mutual Funds Trust (since 1982);
and Director, Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/2/ Director Retired; Director of the Company and Excelsior
6549 Pine Meadows Drive Tax-Exempt Funds, Inc. (since 1985); Chairman
Spring Hill, FL 34606 of the Board of the Company and Excelsior
Age: 74 Tax-Exempt Funds, Inc. (1991-1997) and
Excelsior Institutional Trust (1996-1997);
President and Treasurer of Excelsior Fund and
Excelsior Tax-Exempt Funds, Inc. (1994-1997)
and Excelsior Institutional Trust (1996-1997);
Chairman of the Board, President and Treasurer
of UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56
</TABLE>
_____________________________
2. This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-2b9-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Secretary Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 38
Patricia M. Leyne Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (since August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 32 Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds Services
Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services Company
(from September 1995 to November 1996); Fund
Administrator, Chase Global Funds Services
Company (from February 1993 to September 1995).
</TABLE>
Each director of the Company receives an annual fee of $9,000 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to
receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners, receives
legal fees as counsel to the Company. The employees of CGFSC do not receive any
compensation from the Company for acting as officers of the Company. No person
who is currently an officer, director or employee of the Adviser serves as an
officer, director or employee of the Company. As of May 18, 2000, the
directors and officers of the Company as a group owned beneficially less than 1%
of the outstanding shares of each fund of the Company, and less than 1% of the
outstanding shares of all funds of the Company in the aggregate.
-30-
<PAGE>
The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement Estimated from the Company
Compensation Benefits Accrued Annual and Fund
Name of from as Part of Benefits Upon Complex*
Person/Position the Company Fund Expenses Retirement Paid to Directors
- --------------- ----------- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Donald L. Campbell
Director $ None None $ (3)**
Rodman L. Drake
Director $ None None $ (4)**
Joseph H. Dugan
Director $ None None $ (3)**
Wolfe J. Frankl
Director $ None None $ (3)**
Jonathan Piel
Director $ None None $ (4)**
Robert A. Robinson
Director $ None None $ (3)**
Alfred C. Tannachion
Director $ None None $ (3)**
Frederick S. Wonham
Chairman of the Board,
President and Treasurer $ None None $ (4)**
</TABLE>
__________________________
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust, and, until December 15, 1999, Excelsior
Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
-31-
<PAGE>
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectus. The Adviser has also agreed to pay all expenses incurred by it
in connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, purchased for the
Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Blended Equity, Value and Restructuring and Small Cap Funds
pursuant to advisory agreements substantially similar to the Investment Advisory
Agreements currently in effect for such Funds.
For the services provided and expenses assumed pursuant to the
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly, at the annual rate of 0.75% of the average
daily net assets of each of the Blended Equity and Large Cap Growth Funds,
0.60% of the average daily net assets of each of the Value and Restructuring and
Small Cap Funds and 1.00% of the average daily net assets of the Technology
Fund.
From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Company paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Blended Equity Fund $4,320,430 $3,139,705
Value and Restructuring Fund $2,624,874 $1,163,708
Small Cap Fund $ 241,815 $ 320,547
Large Cap Growth Fund $ 803,946 $ 65,472
</TABLE>
-32-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Adviser voluntarily agreed to waive a portion of its advisory fee for certain
funds. During the periods stated, these waivers reduced advisory fees by the
following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Blended Equity Fund $360,040 $332,044
Value and Restructuring Fund $639,405 $ 84,739
Small Cap Fund $ 51,882 $ 41,845
Large Cap Growth Fund $ 44,157 $ 16,680
</TABLE>
Since the Technology Fund had not commenced investment operations as
of March 31, 2000, no advisory fees or fee waivers have been provided.
The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreements to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.
As discussed in the prospectus, U.S. Trust Corporation, parent of U.S.
Trust, and The Charles Schwab Corporation entered into a definitive agreement to
merge on January 12, 2000. After the merger, U.S. Trust Corporation will be a
wholly-owned subsidiary of Schwab. The merger is anticipated to close by July
2000; however, it is subject to a number of conditions, including certain
regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Funds
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreements (the
"Existing Agreements"). Accordingly, the shareholders of the Funds have been
asked to approve new investment advisory agreements ("New Agreements") between
the Funds and U.S. Trust. The New Agreements will become effective upon the
date of the merger. If the merger is not consummated, the Funds will operate
under the New Agreements, which will become effective upon the date of the
termination of the merger agreement.
-33-
<PAGE>
The New Agreements contain substantially the same terms and conditions
as the Existing Agreements, and the advisory fee will remain the same under the
New Agreements.
CGFSC, Federated Administrative Services (an affiliate of the
Distributor) and U.S. Trust Company (together, the "Administrators") serve as
the Company's administrators and provide the Funds with general administrative
and operational assistance. Under the Administration Agreement, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income and realized capital gains or losses, if
any, of the respective Funds. The Administrators prepare semiannual reports to
the SEC, prepare federal and state tax returns, prepare filings with state
securities commissions, arrange for and bear the cost of processing share
purchase and redemption orders, maintain the Funds' financial accounts and
records, and generally assist in the Funds' operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Company's administrators pursuant to an
administration agreement substantially similar to the Administration Agreement
currently in effect for the Company.
The Administrators also provide administrative services to the other
investment portfolios of the Company and to all of the investment portfolios of
Excelsior Tax-Exempt Fund and Excelsior Institutional Trust which are also
advised by U.S. Trust and its affiliates and distributed by the Distributor.
For services provided to all of the investment portfolios of the Company,
Excelsior Tax-Exempt Fund and Excelsior Institutional Trust (except for the
international portfolios of the Company and Excelsior Institutional Trust), the
Administrators are entitled jointly to fees, computed daily and paid monthly,
based on the combined aggregate average daily net assets of the three companies
(excluding the international portfolios of the Company and Excelsior
Institutional Trust) as follows:
Combined Aggregate Average Daily Net Assets
of the Company, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust (excluding
the international portfolios of the Company
and Excelsior Institutional Trust)
----------------------------------
Annual Fee
----------
First $200 million.............................................. 0.200%
Next $200 million............................................... 0.175%
Over $400 million............................................... 0.150%
Administration fees payable to the Administrators by each portfolio of
the Company, Excelsior Tax-Exempt Fund and Excelsior Institutional Trust are
allocated in proportion to their relative average daily net assets at the time
of determination. From time to time, the Administrators may voluntarily waive
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time.
-34-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Blended Equity Fund $952,859 $707,403
Value and Restructuring Fund $712,300 $315,023
Small Cap Fund $ 74,865 $ 92,358
Large Cap Growth Fund $171,488 $ 16,759
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
<S> <C> <C> <C>
Blended Equity Fund $ 1,957 $ 834
Value and Restructuring Fund $120,091 $3,331
Small Cap Fund $ 28 $ 52
Large Cap Growth Fund $ 1,525 N/A
</TABLE>
Since the Technology Fund had not commenced investment operations as of
March 31, 2000, no administration fees or fee waivers have been provided.
Shareholder Organizations
- -------------------------
The Company has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40%, (0.25% with respect to the Technology Fund), of the average daily net
assets of the Fund's shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recordholder of shares;
(b) assisting in processing purchase, exchange and redemption transactions; (c)
transmitting and receiving funds in connection with Customer orders to
-36-
<PAGE>
purchase, exchange or redeem shares; (d) providing periodic statements showing a
Customer's account balances and confirmations of transactions by the Customer;
(e) providing tax and dividend information to shareholders as appropriate; (f)
transmitting proxy statements, annual reports, updated prospectuses and other
communications from the Company to Customers; and (g) providing or arranging for
the provision of other related services. It is the responsibility of Shareholder
Organizations to advise Customers of any fees that they may charge in connection
with a Customer's investment. Until further notice, the Adviser and
Administrators have voluntarily agreed to waive fees payable by a Fund in an
aggregate amount equal to administrative service fees payable by that Fund.
The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company.
Pursuant to the Plan, the Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of the Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to the Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Company's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Company's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the Company made payments
to Shareholder Organizations in the following amounts:
Amounts Paid to Affiliates
Total Paid of U.S. Trust
-------------
Blended Equity Fund
Value and Restructuring Fund
Small Cap Fund
Large Cap Growth Fund
-37-
<PAGE>
For the fiscal year ended March 31, 1999, the Company made payments
to Shareholder Organizations in the following amounts:
Amounts Paid to Affiliates
Total Paid of U.S. Trust
-------------
Blended Equity Fund $234,639 $223,499
Value and Restructuring Fund $759,496 $215,581
Small Cap Fund $ 51,910 $ 51,808
Large Cap Growth Fund $ 45,682 $ 36,963
For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:
Amounts Paid to Affiliates
Total Paid of U.S. Trust
-------------
Blended Equity Fund $182,660 $175,989
Value and Restructuring Fund $ 88,070 $ 55,667
Small Cap Fund $ 41,897 $ 41,636
Large Cap Growth Fund $ 1,501 $ 1,501
Since the Technology Fund had not commenced investment operations as
of March 31, 2000, no payments made to Shareholder Organizations or payments
made to affiliates of U.S. Trust have been provided.
Expenses
- --------
Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include:
taxes; interest; fees (including fees paid to the Company's directors and
officers who are not affiliated with the Distributor or the Administrators); SEC
fees; state securities qualifications fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent, and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses;
-38-
<PAGE>
costs of independent pricing services; costs of shareholder reports and
shareholder meetings; and any extraordinary expenses. The Funds also pay for
brokerage fees and commissions in connection with the purchase of portfolio
securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under
the Custodian Agreement, Chase has agreed to: (i) maintain a separate account
or accounts in the name of the Funds; (ii) make receipts and disbursements of
money on behalf of the Funds; (iii) collect and receive all income and other
payments and distributions on account of the Funds' portfolio securities; (iv)
respond to correspondence from securities brokers and others relating to its
duties; (v) maintain certain financial accounts and records; and (vi) make
periodic reports to the Company's Board of Directors concerning the Funds'
operations. Chase may, at its own expense, open and maintain custody accounts
with respect to the Funds with other banks or trust companies, provided that
Chase shall remain liable for the performance of all its custodial duties under
the Custodian Agreement, notwithstanding any delegation. Communications to the
custodian should be directed to Chase, Mutual Funds Service Division, 3 Chase
MetroTech Center, 8th Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. For its transfer
agency, dividend-disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services. U.S. Trust New York is located at 114 W. 47th Street, New York, New
York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
-39-
<PAGE>
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Company's Board of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of all portfolio securities of the Funds.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rates may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Fund's portfolio
turnover rates.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. In executing portfolio
transactions for the Funds, the Adviser may use affiliated brokers in accordance
with the requirements of the 1940 Act. The Adviser may also take into account
the sale of Fund shares in allocating brokerage transactions.
During the last three fiscal years, the Company paid brokerage
commissions on behalf of each Fund as shown in the table below:
<TABLE>
<CAPTION>
% of Total
Amount of
Transaction
Total on which
Brokerage % of Total Commissions
Total Commissions Commissions were paid to
Brokerage Paid to Paid to UST UST
Commissions Affiliated Securities Securities
Paid Persons Corp./1/ Corp./1/
<S> <C> <C>
Fiscal year ended March 31, 2000: <C> <C>
Blended Equity Fund $ $ ____% ____%
Value and Restructuring Fund $ $ ____% ____%
Small Cap Fund $ $ ____% ____%
Large Cap Growth Fund $ $ ____% ____%
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
% of Total
Amount of
Transaction
Total on which
Brokerage % of Total Commissions
Total Commissions Commissions were paid to
Brokerage Paid to Paid to UST UST
Commissions Affiliated Securities Securities
Paid Persons Corp/1/ Corp/1/
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 1999:
- --------------------------------
Blended Equity Fund $288,573 $ 0 0% 0%
Value and Restructuring Fund $278,966 $525 0.19% 0.24%
Small Cap Fund $248,422 $ 0 0% 0%
Large Cap Growth Fund $ 89,509 $ 0 0% 0%
Fiscal year ended March 31, 1998:
- --------------------------------
Blended Equity Fund $288,470 $ 0 0% 0%
Value and Restructuring Fund $412,406 $26,847 6.51% 7.74%
Small Cap Fund $131,936 $ 0 0% 0%
Large Cap Growth Fund $ 25,680 $ 0 0% 0%
</TABLE>
_______________________________
/1/ UST Securities Corporation is an affiliate of the Adviser.
Since the Technology Fund had not commenced investment activities as
of March 31, 2000, no brokerage commissions have been provided.
Transactions in domestic over-the-counter markets are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to over-the-
counter transactions, the Funds, where
-41-
<PAGE>
possible, will deal directly with the dealers who make a market in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere.
The Investment Advisory Agreements between the Company and the Adviser
provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems 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 and
whether such broker or dealer is selling shares of the Company, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Company's Board
of Directors from time to time with respect to the extent and continuation of
the policy, to cause the Funds to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion.
Such brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fees payable by the Funds. Such information may
be useful to the Adviser in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Funds.
During the fiscal year ended March 31, 2000, the Adviser directed
Fund brokerage transactions to brokers because of research services provided.
The amounts of such transactions and their related commissions were as
follows:
<TABLE>
<CAPTION>
Fund Amount of Transactions Related Commission
---- ---------------------- ------------------
<S> <C> <C>
Blended Equity Fund $__________ $_________
Value and Restructuring Fund $__________ $_________
Small Cap Fund $__________ $_________
Large Cap Growth Fund $__________ $_________
</TABLE>
Portfolio securities will not be purchased from or sold to the
Adviser, Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.
-42-
<PAGE>
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund and another
investment company or common trust fund, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to the Fund and such other investment company
or common trust fund. In some instances, this investment procedure may
adversely affect the price paid or received by the Funds or the size of the
position obtained by the Funds. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for the Funds with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.
To the extent that the Technology Fund effects brokerage transactions
with any broker-dealer affiliated directly or indirectly with U.S. Trust, such
transactions, including the frequency thereof, the receipt of any commissions
payable in connection therewith, and the selection of the affiliated broker-
dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Technology Fund.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 2000, the following Funds held the following securities of the
Company's regular brokers or dealers or their parents: ________________.
PORTFOLIO VALUATION
-------------------
Assets in the Funds which are traded on a recognized domestic stock
exchange are valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on the national
securities market. Securities traded only on over-the-counter markets are
valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the most recent
bid and asked prices. An option or futures contract is valued at the last sales
price quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, the mean between the last bid
and asked prices. Restricted securities and securities or other assets for
which market quotations are not readily available are valued at fair value,
pursuant to guidelines adopted by the Company's Board of Directors.
Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an event subsequent
to the time where value was so established is likely to have changed such value,
then the fair value of those securities will be determined by consideration of
other factors under the direction of the Board of Directors. A security which
is listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Investments in
debt securities having a maturity of 60 days or
-43-
<PAGE>
less are valued based upon the amortized cost method. All other foreign
securities are valued at the last current bid quotation if market quotations are
available, or at fair value as determined in accordance with guidelines adopted
by the Board of Directors. For valuation purposes, quotations of foreign
securities in foreign currency are converted to U.S. dollars equivalent at the
prevailing market rate on the day of conversion. Some of the securities acquired
by a Fund may be traded on foreign exchanges or over-the-counter markets on days
which are not Business Days. In such cases, the net asset value of the shares
may be significantly affected on days when investors can neither purchase nor
redeem the Fund's shares. The Company's administrators have undertaken to price
the securities in the Funds' portfolio, and may use one or more independent
pricing services in connection with this service.
INDEPENDENT AUDITORS
--------------------
______________, independent auditors, ______________ serve as auditors
of the Company. The Funds' Financial Highlights included in the Prospectus and
the financial statements for the period ended March 31, ______ are incorporated
by reference in this Statement of Additional Information have been audited by
_________________, for the periods included in their reports thereon which
appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners), One
Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103, is
counsel to the Company.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following supplements the tax information contained in the
Prospectus.
For federal income tax purposes, each Fund is treated as a separate
corporate entity and has qualified and intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). Such qualification generally relieves a Fund of liability for
federal income taxes to the extent its earnings are distributed in accordance
with applicable requirements. If, for any reason, a Fund does not qualify for a
taxable year for the special federal tax treatment afforded regulated investment
companies, such Fund would be subject to federal tax on all of its taxable
income at regular corporate rates, without any deduction for distributions to
shareholders. In such event, dividend distributions would be taxable as
ordinary income to shareholders to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders. Moreover, if a Fund
were to fail to make sufficient distributions in a year, the Fund would be
subject to corporate income taxes
-44-
<PAGE>
and/or excise taxes in respect of the shortfall or, if the shortfall is large
enough, the Fund could be disqualified as a regulated investment company.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state, local and foreign taxes.
PERFORMANCE INFORMATION
-----------------------
The Funds may advertise the "average annual total return" for their
shares. Such total return figure reflects the average percentage change in the
value of an investment in a Fund from the beginning date of the measuring period
to the end of the measuring period. Average total return figures will be given
for the most recent one-year period, and may be given for other periods as well
(such as from the commencement of a Fund's operations, or on a year-by-year
basis). The average annual total return is computed by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:
-45-
<PAGE>
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the end
of the applicable period (or a fractional
portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
years.
Each Fund may also advertise the "aggregate total return" for its
shares for various periods, representing the cumulative change in the value of
an investment in the Fund for the specific period. The aggregate total return
is computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate
total return is as follows:
ERV
Aggregate Total Return = [(-------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in a Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Based on the foregoing calculations, the average annual total returns
for each Fund other than the Technology Fund for the fiscal year ended March 31,
2000 and the average annual total returns for the 5-year and 10-year periods
ended March 31, 2000, were as follows:
-46-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
For the Year Ended For the 5 Year Ended For the 10 Year Ended
3/31/00 3/31/00 3/31/00
----------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Blended Equity Fund
Value and Restructuring
Fund*
Small Cap Fund*
Large Cap Growth Fund**
</TABLE>
_____________________
* Commenced operations on December 31, 1992
** Commenced operations on October 1, 1997
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formulas set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value.
The total return of shares of a Fund may be compared to that of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. The total return of the Funds (other than the Technology Fund)
also may be compared to the Standard & Poor's 500 Stock Index ("S&P 500"), an
unmanaged index of common stocks of 500 companies, most of which are listed on
the Exchange, the Consumer Price Index, or the Dow Jones Industrial Average, a
recognized unmanaged index of common stocks of 30 industrial companies listed on
the Exchange. Total return and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the performance of a Fund. Advertisements, sales
literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's
-47-
<PAGE>
performance, including, without limitation, those factors, strategies and
techniques that, together with market conditions and events, materially affected
each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisements, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
Performance will fluctuate and any quotation of performance should not
be considered as representative of a Fund's future performance. Shareholders
should remember that performance is generally a function of the kind and quality
of the instruments held in a portfolio, operating expenses, and market
conditions. Any fees charged by Shareholder Organizations with respect to
accounts of Customers that have invested in shares will not be included in
calculations of performance.
CODE OF ETHICS
The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics which allow for personnel subject to the codes to
invest in securities, including securities that may be purchased or held by the
Funds.
MISCELLANEOUS
-------------
As used herein, "assets allocable to the Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments,
-48-
<PAGE>
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Company not belonging to a particular
portfolio of the Company. In determining a Fund's net asset value, assets
allocable to the Fund are charged with the direct liabilities in respect of the
Fund and with a share of the general liabilities of the Company which are
normally allocated in proportion to the relative asset values of the Company's
portfolios at the time of allocation. Subject to the provisions of the Company's
Charter, determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to a
particular Fund, are conclusive.
As of May 18, 2000, U.S. Trust and its affiliates held of record
substantially all of the Funds' outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
As of May 18, 2000, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding
shares of a Fund were as follows: BLENDED EQUITY FUND: U.S. Trust Retirement
Fund, c/o United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036, 8.96%; and U.S. Trust Company of New York, Trustee, FBO
U.S. Trust Plan, Attn: Sandra Woolcock, 4380 SW Macadam Ave., Suite 450,
Portland, Oregon 97201, 5.51%; VALUE AND RESTRUCTURING FUND: Charles Schwab &
Co. Inc., Special Custody A/C for, Attn: Mutual Funds, 101 Montgomery Street,
San Francisco, California 94104, 26.60%; SMALL CAP FUND: U.S. Trust Retirement
Fund, c/o United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036, 11.53%; TECHNOLOGY FUND: U.S. Trust Retirement Fund, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 29.75%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, _____ (the
"_________ Annual Report") for each Fund other than the Technology Fund are
incorporated in this Statement of Additional Information by reference. No other
parts of the _________ Annual Report are incorporated by reference herein. The
financial statements included in the _________ Annual Report for the Funds have
been audited by the Company's independent auditors ____________, whose reports
thereon also appear in the ________ Annual Report and are incorporated herein by
reference. Such financial statements have been incorporated herein in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing. Additional copies of the ________ Annual Report may be obtained at
no charge by telephoning CGFSC at the telephone number appearing on the front
page of this Statement of Additional Information.
-49-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
-----------------------------------------
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer
ratings
A-1
<PAGE>
are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
A-2
<PAGE>
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
"D-3" - Debt possesses satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation indicates
a satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
"B" - Securities possess speculative credit quality. This designation
indicates uncertain capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic
conditions.
"C" - Securities possess high default risk. This designation indicates a
capacity for meeting financial commitments which is highly uncertain and solely
reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson Financial BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial
A-4
<PAGE>
or economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
"c" - The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
A-5
<PAGE>
"r" - The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds 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 risk appear somewhat larger than the "Aaa" securities.
"A" - Bonds 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 are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa" "Ca" and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
A-6
<PAGE>
Con. (***) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable in periods of greater economic stress.
"BBB" - Debt possesses below-average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles. This is the lowest
investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of
A-7
<PAGE>
exceptionally strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serves as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% -
90%, and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to
satisfy
A-8
<PAGE>
a higher portion of their outstanding obligations, while entities rated "D" have
a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major
rating categories.
"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.
"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category
and indicates an acceptable capacity to repay principal and interest. Issues
rated "BBB" are more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
A-9
<PAGE>
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
A-10
<PAGE>
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in
this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
EXCELSIOR FUNDS, INC.
International Fund
Latin America Fund
Pacific/Asia Fund
Pan European Fund
Emerging Markets Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the International, Latin
America, Pacific/Asia, Pan European and Emerging Markets Funds (individually, a
"Fund" and collectively, the "Funds") of Excelsior Funds, Inc. dated August 1,
2000 (the "Prospectus"). A copy of the Prospectus may be obtained by writing
Excelsior Funds, Inc. c/o Chase Global Funds Services Company, 73 Tremont
Street, Boston, MA 02108-3913 or by calling (800) 446-1012. Capitalized terms
not otherwise defined have the same meaning as in the Prospectus.
The audited financial statements and related report of ____________________,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, _____ are incorporated herein by reference
in the section entitled "Financial Statements." No other parts of the annual
report are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
CLASSIFICATION AND HISTORY................................ 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS............... 1
Foreign Investment Risks............................. 1
Additional Investment Policies....................... 4
Additional Information on Portfolio Instruments...... 7
Investment Limitations............................... 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............ 23
Purchase of Shares................................... 24
Redemption Procedures................................ 25
Other Redemption Information......................... 26
INVESTOR PROGRAMS......................................... 27
Systematic Withdrawal Plan........................... 27
Exchange Privilege................................... 28
Retirement Plans..................................... 28
Automatic Investment Program......................... 29
Additional Information............................... 29
DESCRIPTION OF CAPITAL STOCK.............................. 30
MANAGEMENT OF THE FUNDS................................... 32
Directors and Officers............................... 32
Investment Advisory and Administration Agreements.... 37
Shareholder Organizations............................ 40
Expenses............................................. 42
Custodian and Transfer Agent......................... 42
PORTFOLIO TRANSACTIONS.................................... 43
PORTFOLIO VALUATION....................................... 45
INDEPENDENT AUDITORS...................................... 46
COUNSEL................................................... 46
ADDITIONAL INFORMATION CONCERNING TAXES................... 46
Generally............................................ 46
PERFORMANCE INFORMATION................................... 48
CODE OF ETHICS............................................ 51
MISCELLANEOUS............................................. 51
FINANCIAL STATEMENTS...................................... 52
APPENDIX A................................................ A-1
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. Each Fund is a separate series of the Company and is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Company was organized as a Maryland Corporation on August
2, 1984. Prior to December 28, 1995, the Company was known as "UST Master
Funds, Inc." Prior to August 1, 1997, the Latin America Fund was known as the
Emerging Americas Fund.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------
The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the International, Latin
America, Pacific/Asia and Pan European Funds may not be changed without the vote
of the holders of a majority of its outstanding shares (as defined below). The
investment objective of the Emerging Markets Fund may be changed without
shareholder approval. Except as expressly noted below, each Fund's investment
policies may be changed without shareholder approval.
Foreign Investment Risks
- ------------------------
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers.
Foreign securities markets, while growing in volume, have, for the most part,
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable U.S.-based companies. There is generally less government supervision
and regulation of foreign exchanges, brokers and issuers than there is in the
U.S. The rights of investors in certain foreign countries may be more limited
than those of shareholders of U.S. corporations and the Funds might have greater
difficulty taking appropriate legal action in a foreign court than in a U.S.
court.
Investing in securities of issuers located in developing or emerging
market countries may impose greater risks not typically associated with
investing in more established markets. For example, in many emerging markets
there is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in more
established markets. Securities traded in certain emerging markets may also be
subject to risks due to the inexperience of financial intermediaries, the lack
of modern technology, and the lack of a sufficient capital base to expand
business operations. Developing countries may also impose restrictions on a
Fund's ability to repatriate investment income or capital. Even where there is
no outright restriction on repatriation of investment income or capital, the
mechanics of repatriation may affect certain aspects of the operations of a
Fund. In addition, some of the currencies in emerging markets have experienced
devaluations relative to the U.S. dollar, and major adjustments have been made
periodically in certain of such currencies. Certain developing countries also
face serious exchange restraints and their currencies may not be internationally
traded.
-1-
<PAGE>
Governments of some developing countries exercise substantial
influence over many aspects of the private sector. In some countries, the
government owns or controls many companies, including the largest in the
country. As such, government actions in the future could have a significant
effect on economic conditions in developing countries, which could affect
private sector companies, a Fund and the value of its securities. The
leadership or policies of emerging market countries may also halt the expansion
of or reverse the liberalization of foreign investment policies and adversely
affect existing investment opportunities. Certain developing countries are also
among the largest debtors to commercial banks and foreign governments. Trading
in debt obligations issued or guaranteed by such governments or their agencies
and instrumentalities involves a high degree of risk. Countries such as certain
Eastern European countries also involve the risk of reverting to a centrally
planned economy.
Foreign securities markets also have different registration, clearance
and settlement procedures. Registration, clearance and settlement of securities
in developing countries involve risks not associated with securities
transactions in the United States and other more developed markets. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in registration, clearance or settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
registration, clearance or settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to registration, clearance or settlement problems could result
either in losses to a Fund due to subsequent declines in value of the portfolio
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser.
As an example, the registration, clearing and settlement of securities
transactions in Russia are subject to significant risks not normally associated
with securities transactions in the United States and other more developed
markets. Ownership of shares in Russian companies is reflected by entries in
share registers maintained by registrar companies or the companies themselves,
and the issuance of extracts of the register, although the evidentiary value of
such extracts is uncertain. Formal share certificates may be obtained in
certain limited cases. Russian share registers may be unreliable, and a Fund
could possibly lose its registration through oversight, negligence or fraud.
Russia also lacks a centralized registry to record securities transactions and
registrar companies are located throughout Russia. There can be no assurance
that registrar companies will provide extracts to potential purchasers in a
timely manner or at all and are not necessarily subject to effective state
supervision. In addition, while registrars are liable under law for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Although Russian companies with more than
1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. These practices may also
prevent a Fund from investing in the securities of certain Russian companies
deemed suitable by the Adviser and could cause a delay
-2-
<PAGE>
in the sale of Russian securities by a Fund if the company deems a purchaser
unsuitable, which may expose the Fund to potential loss on its investment.
From time to time, a Fund may invest a significant portion of its
total assets in the securities of issuers located in the same country.
Investment in a particular country of a significant portion of a Fund's total
assets will make the Fund's performance more dependent upon the political and
economic circumstances of that country than a mutual fund that is more
geographically diversified.
Dividends and interest payable on a Fund's foreign portfolio
securities may be subject to foreign withholding taxes. Each Fund also may be
subject to taxes on trading profits in some countries. In addition, some
countries have a transfer or stamp duties tax on certain securities
transactions. The imposition of these taxes will increase the cost to a Fund of
investing in any country imposing such taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under the federal income
tax provisions, they may reduce the net return to the Fund's shareholders.
Investors should also understand that the expense ratio of the Funds can be
expected to be higher than those of funds investing in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as the higher cost of investment research, higher cost of custody of
foreign securities, higher commissions paid on comparable transactions on
foreign markets and additional costs arising from delays in settlements of
transactions involving foreign securities.
The Latin American economies have experienced considerable
difficulties in the past decade. Although there have been significant
improvements in recent years, the Latin American economies continue to
experience significant problems, including high inflation rates and high
interest rates. Inflation and rapid fluctuations in inflation rates have had and
may continue to have very negative effects on the economies and securities
markets of certain Latin American countries. The emergence of the Latin American
economies and securities markets will require continued economic and fiscal
discipline which has been lacking at times in the past, as well as stable
political and social conditions. There is no assurance that economic initiatives
will be successful. Recovery may also be influenced by international economic
conditions, particularly those in the United States, and by world prices for oil
and other commodities.
The extent of economic development, political stability and market
depth of different countries in the Pacific/Asia region varies widely. Certain
countries in the region are either comparatively underdeveloped or are in the
process of becoming developed, and investments in the securities of issuers in
such countries typically involve greater potential for gain or loss than
investments in securities of issuers in more developed countries. Certain
countries in the region also depend to a large degree upon exports of primary
commodities and, therefore, are vulnerable to changes in commodity prices which,
in turn, may be affected by a variety of factors. The Pacific/Asia Fund may be
particularly sensitive to changes in the economies of certain countries in the
Pacific/Asia region resulting from any reversal of economic liberalization,
political unrest or the imposition of sanctions by the United States or other
countries.
-3-
<PAGE>
Additional Investment Policies
- ------------------------------
In determining the preferred allocation of investments of the Funds
among various geographic regions and countries, the Adviser will consider, among
other things, regional and country-by-country prospects for economic growth,
anticipated levels of inflation, prevailing interest rates, the historical
patterns of government regulation of the economy and the outlook for currency
relationships.
The International Fund does not intend to have, at any time, a
specified percentage of its assets invested either for growth or for income, and
all or any portion of its assets may be allocated among these two components
based on the Adviser's analysis of the prevailing market conditions. Although
the Fund will seek to realize its investment objective primarily through
investments in foreign equity securities, it may, from time to time, assume a
defensive position by allocating all or any portion of its assets to foreign
debt obligations. While there are no prescribed limits on geographic
distribution, the Fund will normally include in its portfolio securities of
issuers collectively having their principal business in no fewer than three
foreign countries.
The countries in which the International Fund may invest, include but
are not limited to: Japan, France, the United Kingdom & Possessions, Italy,
Germany, Switzerland, the Netherlands, Australia, Singapore, Sweden, Canada,
Ireland, Thailand, Spain, Portugal, Hong Kong, Israel, Argentina, Chile,
Hungary, India, Philippines and Portugal.
Under normal circumstances, each of the Latin America, Pacific/Asia
and Pan European Funds (collectively, the "Regional Funds") will invest at least
65% of its total assets in securities of issuers based in its targeted region.
A company is "based in" a region if it derives more than half of its assets,
revenues or profits from such region. The Regional Funds currently do not
expect to invest more than 25% of their total assets in the securities issued by
any single foreign government. Any such investment would subject the particular
Regional Fund to the risks presented by investing in securities of such foreign
government to a greater extent than it would if that Fund's assets were not so
concentrated.
The countries in which the Pacific/Asia Fund may invest, include but
are not limited to: Japan, Singapore, Hong Kong, Australia, South Korea,
Thailand, New Zealand, Philippines, and India. The countries in which the Latin
America Fund may invest, include but are not limited to: Mexico, Brazil,
Argentina, Chile, Peru, and Brazil. The countries in which the Pan European
Fund may invest, include but are not limited to: France, the United Kingdom &
Possessions, Italy, Germany, the Netherlands, Switzerland, Sweden, Ireland,
Spain, Portugal, Croatia, Finland, Poland, and Turkey.
Under normal market and economic conditions, at least 75% of the
International and each Regional Fund's assets will be invested in foreign
securities. Foreign securities include common stock, preferred stock,
securities convertible into common stock, warrants, bonds, notes and other debt
obligations issued by foreign entities, as well as shares of U.S. registered
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<PAGE>
investment companies that invest primarily in foreign securities. Foreign debt
securities purchased by a Fund may include obligations issued in the
Eurocurrency markets and obligations of foreign governments and their political
subdivisions. In addition, each Fund may invest in U.S. government obligations,
including the when-issued securities of such issuers, and obligations issued by
U.S. companies which are either denominated in foreign currency and sold abroad
or, if denominated in U.S. dollars, payment on which is determined by reference
to some other foreign currency.
Convertible and non-convertible debt securities purchased by the
International and Regional Funds will be rated "investment grade" (i.e.,
classified within the four highest ratings of a nationally recognized
statistical rating organization such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P")) or, if unrated,
determined by the Adviser to be of comparable quality. Debt obligations rated
in the lowest of the top four "investment grade" ratings ("Baa" by Moody's and
"BBB" by S&P) are considered to have some speculative characteristics and may be
more sensitive to adverse economic change than higher rated securities. Each
Fund will sell in an orderly fashion as soon as possible any convertible and
non-convertible debt securities it holds if they are downgraded below "Baa" by
Moody's or below "BBB" by S&P. Foreign securities are generally unrated. In
purchasing foreign equity securities, the Adviser will look generally to
established foreign companies. Each Fund may purchase securities both on
recognized stock exchanges and in over-the-counter markets. Most of the Funds'
portfolio transactions will be effected in the primary trading market for the
given security.
Under normal conditions, at least 65% of the Emerging Markets Fund's
total assets will be invested in emerging country equity securities. While
there are no prescribed limited on its geographic distribution, the Fund will
normally invest in securities of issuers from at least three different emerging
countries. With respect to the Fund, equity securities include common and
preferred stocks, convertible securities, rights and warrants to purchase common
stocks, and sponsored and unsponsored depository receipts and other similar
instruments. There are currently over 130 countries which, in the opinion of
the Adviser, are generally considered to be emerging or developing countries by
the international financial community, approximately 40 of which currently have
stock markets. These countries generally include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. Currently, investing in many emerging countries is
not feasible or may involve unacceptable political risks. The countries in
which the Fund may invest include, but are not limited to: Argentina; Botswana;
Brazil; Chile; China; Colombia; Ghana; Greece; Hong Kong; Hungary; India;
Indonesia; Israel; Jamaica; Jordan; Kenya; Malaysia; Mexico; Morocco; Nigeria;
Pakistan; Peru; Philippines; Poland; Portugal; Russia; South Africa; South
Korea; Sri Lanka; Taiwan; Thailand; Turkey; Venezuela; and Zimbabwe.
As markets in other countries develop, the Emerging Markets Fund may
expand and further diversify the emerging countries in which it invests. The
Fund generally intends to invest only in securities in countries where the
currency is freely convertible to U.S. dollars.
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<PAGE>
An emerging country security is one issued by a company that, in the
opinion of the Adviser, has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging country; (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in emerging countries; or (iii)
it is organized under the laws of, and has a principal office in, an emerging
country. The Adviser will base determinations as to eligibility on publicly
available information and inquiries made to the companies.
To the extent that the Emerging Markets Fund's assets are not invested
in emerging country equity securities, the remainder of its assets may be
invested in: (i) debt securities denominated in the currency of an emerging
country or issued or guaranteed by an emerging country company or the government
of an emerging country; (ii) equity or debt securities of corporate or
governmental issuers located in industrialized countries; (iii) short-term
medium-term debt securities; and (iv) other securities described below under
"Additional Information on Portfolio Instruments." When deemed appropriate by
the Adviser, the Fund may invest up to 10% of its total assets in lower quality
debt securities. Lower quality debt securities, also known as "junk bonds," are
often considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than those of higher quality securities and
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. Securities in the lowest quality
category may present the risk of default, or may be in default.
Additional risks associated with lower-rated fixed income securities
are (a) the relative youth and growth of the market for such securities, (b) the
relatively low trading market liquidity for the securities, (c) the impact that
legislation may have on the high-yield bond market (and, in turn, on the Fund's
net asset value and investment practices), (d) the operation of mandatory
sinking fund or call/redemption provisions during periods of declining interest
rates whereby the Fund may be required to reinvest premature redemption proceeds
in lower yielding portfolio securities and (e) the creditworthiness of the
issuers of such securities. During an economic downturn or substantial period
of rising interest rates, highly-leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals and to obtain
additional financing. An economic downturn could also disrupt the market for
lower-rated bonds generally and adversely affect the value of outstanding bonds
and the ability of the issuers to repay principal and interest. If the issuer of
a lower-rated security held by the Fund defaulted, the Fund could incur
additional expenses to seek recovery. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower-rated securities held by the Fund, especially in a
thinly traded market.
Under unusual economic and market conditions, each Fund may restrict
the securities markets in which its assets are invested and may invest all or a
major portion of its assets in U.S. government obligations or in U.S. dollar-
denominated securities of U.S. companies. During normal market conditions, up
to 25% of each Fund's assets may also be held
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<PAGE>
on a continuous basis in cash or invested in U.S. money market instruments to
meet redemption requests or to take advantage of emerging investment
opportunities.
Additional Information on Portfolio Instruments
- -----------------------------------------------
Forward Currency Transactions
-----------------------------
Each Fund will conduct its currency exchange transactions either on a
spot (i.e. cash) basis at the rate prevailing in the currency exchange markets,
or by entering into forward currency contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency for a set price
at a future date. In this respect, forward currency contracts are similar to
foreign currency futures contracts described below; however, unlike futures
contracts, which are traded on recognized commodities exchanges, forward
currency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts.
A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions. The
Adviser does not expect to hedge positions as a routine investment technique,
but anticipates hedging principally with respect to specific transactions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose
of transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Funds will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
a Fund's assets, but will be employed as necessary to correspond to particular
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied. When a Fund takes a long position in a forward currency
contract, it must maintain a segregated account containing liquid assets equal
to the purchase price of the contract, less any margin or deposit. When a Fund
takes a short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable
when a Fund "covers" a forward currency position generally by entering into an
offsetting position.
The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not
-7-
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eliminate fluctuations in the underlying prices of the securities being hedged,
but it does establish a rate of exchange that can be achieved in the future.
Thus, although forward currency contracts used for transaction or position
hedging purposes may limit the risk of loss due to an increase in the value of
the hedged currency, at the same time they limit potential gain that might
result were the contracts not entered into. Further, the Adviser may be
incorrect in its expectations as to currency fluctuations, and a Fund may incur
losses in connection with its currency transactions that it would not otherwise
incur. If a price movement in a particular currency is generally anticipated, a
Fund may not be able to contract to sell or purchase that currency at an
advantageous price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
Gold Bullion
------------
Each Fund may invest up to 5% of its total assets in gold bullion by
purchasing gold bars primarily of standard weight (approximately 400 troy
ounces) at the best available prices in the New York bullion market. However,
the Adviser will have discretion to purchase or sell gold bullion in other
markets, including foreign markets, if better prices can be obtained. Gold
bullion is valued by the Funds at the mean between the closing bid and asked
prices in the New York bullion market as of the close of the New York Stock
Exchange each business day. When there is no readily available market quotation
for gold bullion, the bullion will be valued by such method as determined by the
Company's Board of Directors to best reflect its fair value. For purpose of
determining net asset value, gold held by a Fund, if any, will be valued in U.S.
dollars. Investments in gold will not produce dividends or interest income, and
the Funds can look only to price appreciation for a return on such investments.
Money Market Instruments
------------------------
"Money market instruments" which may be purchased by each Fund in
accordance with its policies include, among other things, bank obligations,
commercial paper and corporate bonds with remaining maturities of 13 months or
less.
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<PAGE>
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings and loan association or savings bank which is insured by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. Bank
obligations also include U.S. dollar-denominated obligations of foreign branches
of U.S. banks and obligations of domestic branches of foreign banks.
Investments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at time of purchase.
Investments by a Fund in commercial paper will consist of issues that
are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by each Fund.
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by a Fund, each Fund may, from time to time as specified in
the instrument, demand payment of the principal of the instrument or may resell
the instrument to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods when a Fund is not
entitled to exercise its demand rights, and a Fund could, for this or other
reasons, suffer a loss with respect to such instrument.
Repurchase Agreements
---------------------
Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations discussed below under "Illiquid Securities."
The seller under a repurchase agreement will be required to maintain
the value of the securities which are subject to the agreement and held by a
Fund at not less than the repurchase price. Default or bankruptcy of the seller
would, however, expose a Fund to possible delay in connection with the
disposition of the underlying securities or loss to the extent that proceeds
from a sale of the underlying securities were less than the repurchase price
under the agreement.
The repurchase price under a repurchase agreement generally equals the
price paid by a Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to repurchase agreements are held by
the Funds' custodian (or sub-custodian) or in the
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Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the 1940 Act.
Securities Lending
------------------
To increase return on its portfolio securities, each Fund may lend its
portfolio securities to broker/dealers pursuant to agreements requiring the
loans to be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. Collateral for such loans may
include cash, securities of the U.S. government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total assets.
There may be risks of delay in receiving additional collateral or in recovering
the securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans are made only to
borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.
When a Fund lends its portfolio securities, it continues to receive
interest or dividends on the securities lent and may simultaneously earn
interest on the investment of the cash loan collateral, which will be invested
in readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities lent pass to the borrower,
such loans may be called at any time and will be called so that the securities
may be voted by a Fund if a material event affecting the investment is to occur.
Government Obligations
----------------------
Examples of the types of U.S. government obligations that may be held
by the Funds include, in addition to U.S. Treasury Bills, the obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, Federal National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks and Maritime Administration.
-10-
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Options
-------
The Regional Funds and Emerging Markets Fund may purchase put and call
options for hedging purposes or to increase total return. Such purchases would
be in an amount not exceeding 5% of each Fund's net assets. Such options may or
may not be listed on a U.S. or foreign exchange and issued by the Options
Clearing Corporation, and may relate to particular securities, various stock or
bond indices or foreign currencies. Unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
Purchase of options is a highly specialized activity which entails a
substantial risk of a complete loss of the amounts paid as premiums to the
writer of the options. Regardless of how much the market price of the
underlying security or the value of a foreign currency increases or decreases,
the option buyer's risk is limited to the amount of the original investment for
the purchase of the option. However, options may be more volatile than the
underlying securities or currency, and therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities or currency. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and the
writer has the obligation to sell to the clearing corporation, the underlying
security or currency at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security or
currency. The premium paid to the writer is in consideration for undertaking
the obligations under the option contract. A listed put option gives the
purchaser the right to sell to a clearing corporation the underlying security or
currency at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security or currency. Put
and call options purchased by the Funds will be valued at the last sale price
or, in the absence of such a price, at the mean between bid and asked prices.
In addition, each Fund, including the International Fund, may engage
in writing covered call options (options on securities owned by such Fund) and
enter into closing purchase transactions with respect to such options. Such
options must be listed on a U.S. or foreign exchange and may or may not be
issued by Options Clearing Corporation. The aggregate value of the securities
subject to options written by a Fund may not exceed 25% of the value of its net
assets. By writing a covered call option, a Fund forgoes the opportunity to
profit from an increase in the market price of the underlying security above the
exercise price except insofar as the premium represents such a profit, and it
will not be able to sell the underlying security until the option expires or is
exercised or the Fund effects a closing purchase transaction by purchasing an
option of the same series.
When a Fund writes a covered call option, it may terminate its
obligation to sell the underlying security prior to the expiration date of the
option by executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit
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<PAGE>
the writing of a new call option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
writer will have incurred a loss on the transaction. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. There is no assurance that a liquid secondary market on an
exchange will exist for any particular option. A covered option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying security until the option expires or the underlying security is
delivered upon exercise, with the result that the writer in such circumstances
will be subject to the risk of market decline in the underlying security during
such period. A Fund will write an option on a particular security only if the
Adviser believes that a liquid secondary market will exist on an exchange for
options of the same series, which will permit the Fund to make a closing
purchase transaction in order to close out its position.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date, or if the Fund involved enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold),
and the deferred credit related to such option will be eliminated. If an option
is exercised, the Fund involved may deliver the underlying security from its
portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Fund involved will realize a gain or loss. Premiums from
expired call options written by the Funds and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. The use of covered call options is not a primary investment technique
of the Funds and such options will normally be written on underlying securities
as to which the Adviser does not anticipate significant short-term capital
appreciation.
Futures Contracts and Related Options
-------------------------------------
Each Fund may invest in futures contracts and related options. Each
Fund may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on recognized exchanges or
in other established financial markets. A futures contract on foreign currency
creates a binding obligation on one party to deliver, and a corresponding
obligation on another party to accept delivery of, a stated quantity of a
foreign currency for an amount fixed in U.S. dollars. Foreign currency futures,
which operate in a manner similar to interest rate futures contracts, may be
used by the Funds to hedge against exposure to fluctuations in exchange rates
between the U.S. dollar and other currencies arising from multinational
transactions.
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<PAGE>
The Funds will not engage in futures transactions for speculation, but
only as a hedge against changes in market values of securities which a Fund
holds or intends to purchase. In addition, a Fund may enter into futures
transactions in order to offset an expected decrease in the value of its
portfolio positions that might otherwise result from a currency exchange
fluctuation. The Funds will engage in futures transactions only to the extent
permitted by the Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC"). When investing in futures
contracts, the Funds must satisfy certain asset segregation requirements to
ensure that the use of futures is unleveraged. When a Fund takes a long
position in a futures contract, it must maintain a segregated account containing
liquid assets equal to the purchase price of the contract, less any margin or
deposit. When a Fund takes a short position in a futures contract, the Fund
must maintain a segregated account containing liquid assets in an amount equal
to the market value of the securities underlying such contract (less any margin
or deposit), which amount must be at least equal to the market price at which
the short position was established. Asset segregation requirements are not
applicable when a Fund "covers" an options or futures position generally by
entering into an offsetting position. Each Fund will limit its hedging
transactions in futures contracts and related options so that, immediately after
any such transaction, the aggregate initial margin that is required to be posted
by a Fund under the rules of the exchange on which the futures contract (or
futures option) is traded, plus any premiums paid by such Fund on its open
futures options positions, does not exceed 5% of such Fund's total assets, after
taking into account any unrealized profits and unrealized losses on the Fund's
open contracts (and excluding the amount that a futures option is "in-the-money"
at the time of purchase). An option to buy a futures contracts is "in-the-
money" if the then-current purchase price of the underlying futures contract
exceeds the exercise or strike price; an option to sell a futures contract is
"in-the-money" if the exercise or strike price exceeds the then-current purchase
price of the contract that is the subject of the option. In addition, the use
of futures contracts is further restricted to the extent that no more than 10%
of each Fund's total assets may be hedged.
Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on a
Fund's ability to effectively hedge.
Transactions in futures as a hedging device may subject a Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market,
currency exchange rates and other economic factors. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts (or options) and movements in the price of the instruments
being hedged. In addition, investments in futures may subject a Fund to losses
due to
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<PAGE>
unanticipated market movements which are potentially unlimited. Further, there
is no assurance that a liquid market will exist for any particular futures
contract (or option) at any particular time. Consequently, a Fund may realize a
loss on a futures transaction that is not offset by a favorable movement in the
price of securities which it holds or intends to purchase or may be unable to
close a futures position in the event of adverse price movements. For example,
if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. In addition, in some situations, if
a Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
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Options on Futures Contracts
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the instruments
being hedged, an option may or may not be less risky than ownership of the
futures contract or such instruments. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). Although permitted by
their fundamental investment policies, the Funds do not currently intend to
write futures options, and will not do so in the future absent any necessary
regulatory approvals.
When-Issued and Forward Transactions
------------------------------------
Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days.
The Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.
When a Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
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<PAGE>
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Brady Bonds
-----------
The Latin America and Emerging Markets Funds may invest in Brady
Bonds, which are securities created through the exchange of existing commercial
bank loans to Latin American public and private entities for new bonds in
connection with debt restructuring under a debt restructuring plan announced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily the U.S. dollar) and are currently actively traded in the
over-the-counter secondary market for Latin American debt instruments.
Dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.
All Mexican Brady Bonds issued to date, except New Money Bonds, have
principal repayments at final maturity fully collateralized by U.S. Treasury
zero coupon bonds
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<PAGE>
(or comparable collateral in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. Approximately half of the Venezuelan Brady Bonds
issued to date have principal repayments at final maturity collateralized by
U.S. Treasury zero coupon bonds (or comparable collateral in other currencies),
while slightly more than half have interest coupon payments collateralized on a
14-month rolling-forward basis by securities held by the Federal Reserve Bank of
New York as collateral agent.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
ADRs, EDRs and GDRs
-------------------
Each Fund may invest indirectly in the securities of foreign issuers
through sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar instruments. ADRs typically are issued by an American bank or
trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental
Depository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic
underlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR
and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, EDRs and
GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile
than if such instruments were sponsored by the issuer.
Each Fund may also invest indirectly in foreign securities through
share entitlement certificates. Share entitlement certificates are transferable
securities similar to depository receipts which are structured like global debt
issues to facilitate trading on an international basis. The holder of a share
entitlement certificate holds a fully collateralized obligation of the issuer
the value of which is linked directly to that of the underlying foreign
security.
World Equity Benchmark Shares/SM/
-------------------------------
Each Fund may invest up to 5% of its total assets in World Equity
Benchmark Shares/SM/ issued by The Foreign Fund, Inc. ("WEBS"), closed-end funds
and similar securities of other issuers. WEBS are shares of an investment
company that invests substantially all of its assets in securities included in
the Morgan Stanley Capital International ("MSCI") indices for specific
countries. Because the expense associated with an investment in WEBS may be
substantially lower than the expense of small investments directly in the
securities comprising
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<PAGE>
the indices they seek to track, U.S. Trust believes that investments in WEBS may
provide a cost-effective means of diversifying a Fund's assets across a broad
range of equity securities.
The market prices of WEBS are expected to fluctuate in accordance with
both changes in the net asset values of their underlying indices and the supply
and demand of WEBS on the exchanges on which they are traded. To date, WEBS
have traded at relatively modest discounts and premiums to their net assets
values. However, WEBS have a limited operating history, and information is
lacking regarding the actual performance and trading liquidity of WEBS for
extended periods or over complete market cycles. In addition, there is no
assurance that the requirements of the exchanges necessary to maintain the
listing of WEBS will continue to be met or will remain unchanged. In the event
substantial market or other disruptions affecting WEBS should occur in the
future, the liquidity and value of a Fund's Shares could be adversely affected.
Investment Company Securities
-----------------------------
Each Fund may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. Each Fund may also purchase shares of investment companies
investing primarily in foreign securities, including so called "country funds,"
which have portfolios consisting exclusively of securities of issuers located in
one foreign country, and funds that invest in securities included in foreign
security indices, such as WEBS. The Regional Funds will limit their investments
in such funds to those funds which invest in the appropriate regions in light of
their respective investment policies. Securities of other investment companies
will be acquired by a Fund within the limits prescribed by the 1940 Act, which
include, subject to certain exceptions, a prohibition against the Fund investing
more than 10% of the value of its total assets in such securities. In addition
to the advisory fees and other expenses each Fund bears directly in connection
with its own operations, as a shareholder of another investment company, each
Fund would bear its pro rata portion of the other investment company's advisory
fees and other expenses. As such, a Fund's shareholders would indirectly bear
the expenses of the Fund and the other investment company, some or all of which
would be duplicative.
[Each Fund may invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
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<PAGE>
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a
Creation Unit. The liquidity of small holdings of SPDRs, therefore, will depend
upon the existence of a secondary market. Upon redemption of a Creation Unit,
the Fund will receive Index Securities and cash identical to the Portfolio
Deposit required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of
a SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.]
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The SEC views reverse repurchase agreements as a form
of borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price of those securities.
Illiquid Securities
-------------------
No Fund will knowingly invest more than 10% (15%, with respect to the
Emerging Markets Fund) of the value of its net assets in securities that are
illiquid. A security will be considered illiquid if it may not be disposed of
within seven days at approximately the value at which the particular Fund has
valued the security. Each Fund may purchase securities which are not registered
under the Securities Act of 1933, as amended (the "1933 Act"), but which can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered illiquid so long as it is
determined by the Adviser, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers are no longer
interested in purchasing these restricted securities.
The Emerging Markets Fund may also purchase other non-publicly traded
securities, private placements and restricted securities. These securities may
involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the
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<PAGE>
absence of a public trading market for these securities, they may be less liquid
than publicly-traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from sales could be less
than those originally paid by the Fund or less than what may be considered the
fair value of such securities. Furthermore, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly-traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration.
Portfolio Turnover
------------------
Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
attaining the investment objective of the particular Fund. Portfolio
investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments. A high rate of portfolio turnover may
involve correspondingly greater brokerage commission expenses and other
transaction costs, which must be borne directly by a Fund and ultimately by its
shareholders. High portfolio turnover may result in the realization of
substantial net capital gains.
Miscellaneous
-------------
The International and Regional Funds may not invest in oil, gas or
mineral leases.
Investment Limitations
- ----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a
Fund only by a vote of the holders of a majority of such Fund's outstanding
shares. As used herein, a "vote of the holders of a majority of the outstanding
shares" of the Company or a particular Fund means, with respect to the approval
of an investment advisory agreement or a change in a fundamental investment
policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Company or such Fund, or (b) 67% or more of the shares
of the Company or such Fund present at a meeting if more than 50% of the
outstanding shares of the Company or such Fund are represented at the meeting in
person or by proxy. Investment limitations which are "operating policies" with
respect to a Fund may be changed by the Company's Board of Directors without
shareholder approval.
The following investment limitations are fundamental with respect to
each Fund. A Fund may not:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
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<PAGE>
2. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate;
3. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitation contained in the Prospectus
might be considered to be the issuance of a senior security;
4. Purchase securities of any one issuer, other than U.S. government
obligations, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that up
to 25% of the value of its total assets may be invested without regard to this
5% limitation;
5. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, providing that (a) with respect to the International Fund,
there is no limitation with respect to securities issued or guaranteed by the
U.S. government or domestic bank obligations, (b) with respect to the Latin
America, Pacific/Asia, Pan European and Emerging Markets Funds, there is no
limitation with respect to securities issued or guaranteed by the U.S.
government, and (c) neither all finance companies, as a group, nor all utility
companies, as a group, are considered a single industry for purposes of this
policy; and
6. Make loans, except that (i) a Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) each
of the International, Latin America, Pacific/Asia and Pan European Funds may
lend portfolio securities in an amount not exceeding 30% of its total assets,
and (iii) the Emerging Markets Fund may lend portfolio securities in accordance
with its investment objective and policies.
The following investment limitations are fundamental with respect to
the International Fund, but are operating policies with respect to the Latin
America, Pacific/Asia, Pan European and Emerging Markets Funds. Each Fund may
not:
7. Purchase securities on margin, make short sales of securities, or
maintain a short position;
8. Invest in companies for the purpose of exercising management or
control; and
9. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
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<PAGE>
The following investment limitations are fundamental with respect to
the International Fund. The International Fund may not:
10. Invest in or sell put options, call options, straddles, spreads,
or any combination thereof; provided, however, that the Fund may write covered
call options with respect to its portfolio securities that are traded on a
national securities exchange or on foreign exchanges and may enter into closing
purchase transactions with respect to such options if, at the time of the
writing of such option, the aggregate value of the securities subject to the
options written by the Fund does not exceed 25% of the value of its total
assets; and provided that the Fund may enter into forward currency contracts in
accordance with its investment objective and policies;
11. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years;
12. Purchase or sell commodities futures contracts or invest in oil,
gas, or other mineral exploration or development programs; provided, however,
that (i) this shall not prohibit the Fund from purchasing publicly traded
securities of companies engaging in whole or in part in such activities; and
(ii) the Fund may enter into forward currency contracts, futures contracts and
related options and may invest up to 5% of its total assets in gold bullion; and
13. Knowingly invest more than 10% of the value of its total assets
in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available.
The following investment limitation is fundamental with respect to the
International, Latin America, Pacific/Asia and Pan European Funds. Each of such
Funds may not:
14. Borrow money, except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes). The Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding. Optioned stock held in escrow is not deemed to be a
pledge.
The following investment limitation is fundamental with respect to the
Latin America, Pacific/Asia, Pan European and Emerging Markets Funds. Each of
such Funds may not:
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<PAGE>
15. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that (i) this shall not prohibit a Fund from purchasing
publicly traded securities of companies engaging in whole or in part in such
activities; and (ii) a Fund may enter into forward currency contracts, futures
contracts and related options and may invest up to 5% of its total assets in
gold bullion.
The Emerging Markets Fund may not:
16. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act.
* * *
In addition to the investment limitations described above, as a matter
of fundamental policy for each Fund which may not be changed without the vote of
the holders of a majority of the Fund's outstanding shares, a Fund may not
invest in the securities of any single issuer if, as a result, the Fund holds
more than 10% of the outstanding voting securities of such issuer.
The International Fund will not invest more than 25% of the value of
its total assets in domestic bank obligations.
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
In addition to the above investment limitations, each Fund currently
intends to limit its investments in warrants so that, valued at the lower of
cost or market value, they do not exceed 5% of the Fund's net assets. For the
purpose of this limitation, warrants acquired by a Fund in units or attached to
securities will be deemed to be without value. Each Fund also intends to
refrain entering into arbitrage transactions.
The International Fund may not purchase or sell commodities except as
provided in Investment Limitation No. 12 above.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
-23-
<PAGE>
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Company's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Purchase of Shares
Shares of the Funds are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder
Organization.
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<PAGE>
Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Company. A Shareholder
Organization may elect to hold of record shares for its Customers and to record
beneficial ownership of shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility
to transmit to the Distributor all purchase requests for its Customers and to
transmit, on a timely basis, payment for such requests to Chase Global Funds
Services Company ("CGFSC"), the Funds' sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases (and redemptions) will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a
Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization
continues to place its Customers' purchase (and redemption) requests with the
Funds, CGFSC will send confirmations of such transactions and periodic account
statements directly to the shareholders of record. Shares in the Funds bear the
expense of fees payable to Shareholder Organizations for such services. See
"Shareholder Organizations."
Redemption Procedures
- ---------------------
Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Company, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. A 2% redemption fee is charged on
certain redemptions. See the prospectus for further details. Investors may
redeem all or part of their shares in accordance with any of the procedures
described below (these procedures also apply to Customers of Shareholder
Organizations for whom individual accounts have been established with CGFSC).
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<PAGE>
As discussed in the Prospectus, a redemption request for an amount
in excess of $50,000 per account, or for any amount if the proceeds are to be
sent elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for shares redeemed will
ordinarily be made by mail within five Business Days after receipt by CGFSC of
the redemption request in good order. Questions with respect to the proper form
for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).
Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
- ----------------------------
The Company may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
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<PAGE>
The Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. The Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.
Under certain circumstances, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.
-27-
<PAGE>
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Company or Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund" and,
collectively with the Company, the "Companies") or for Shares of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.
Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
- ----------------
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):
. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
. Profit Sharing and Money-Purchase Plans for corporations and self-
employed individuals and their partners to benefit themselves and
their employees; and
-28-
<PAGE>
. Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase
shares of the Funds pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.
Automatic Investment Program
- ----------------------------
The Automatic Investment Program permits Investors to purchase shares
(minimum of $50 per Fund per transaction) at regular intervals selected by the
Investor. The minimum initial investment for an Automatic Investment Program
account is $50 per Fund. Provided the Investor's financial institution allows
automatic withdrawals, shares are purchased by transferring funds from an
Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.
The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, dollar cost averaging should
usually be followed on a sustained, consistent basis. Investors should be
aware, however, that shares bought using dollar cost averaging are purchased
without regard to their price on the day of investment or to market trends. In
addition, while Investors may find dollar cost averaging to be beneficial, it
will not prevent a loss if an Investor ultimately redeems his shares at a price
which is lower than their purchase price. The Company may modify or terminate
this privilege at any time or charge a service fee, although no such fee
currently is contemplated. An Investor may also implement the dollar cost
averaging method on his own initiative or through other entities.
Additional Information
- ----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
-29-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
----------------------------
The Company's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of common stock, $.001 par value
per share, and to classify or reclassify any unissued shares of the Company into
one or more classes or series by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into 46 series of shares representing interests in 18 investment
portfolios.
Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the Company's Board of Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.
Shareholders of the Company are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of the Company voting
without regard to class.
The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a
-30-
<PAGE>
Fund to another management investment company for consideration which may
include securities issued by the purchaser and, in connection therewith, to
cause all outstanding shares of the Fund involved to be redeemed at a price
which is equal to their net asset value and which may be paid in cash or by
distribution of the securities or other consideration received from the sale and
conveyance; (b) sell and convert a Fund's assets into money and, in connection
therewith, to cause all outstanding shares of the Fund involved to be redeemed
at their net asset value; or (c) combine the assets belonging to a Fund with the
assets belonging to another portfolio of the Company, if the Board of Directors
reasonably determines that such combination will not have a material adverse
effect on shareholders of any portfolio participating in such combination, and,
in connection therewith, to cause all outstanding shares of the Fund involved to
be redeemed at their net asset value or converted into shares of another class
of the Company's common stock at net asset value. The exercise of such authority
by the Board of Directors will be subject to the provisions of the 1940 Act, and
the Board of Directors will not take any action described in this paragraph
unless the proposed action has been disclosed in writing to the particular
Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.
Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.
-31-
<PAGE>
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The directors and executive officers of the Company, their addresses,
ages, principal occupations during the past five years, and other affiliations
are as follows:
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ----------------- ----------------------------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Chairman of the Boards (since
238 June Road President and Treasurer 1997), and President, Treasurer and
Stamford, CT 06903 Director of the Company and Excelsior
Age: 68 Tax-Exempt Funds, Inc. (since 1995);
Chairman of the Board (since 1997),
President, Treasurer and Trustee (since
1995) of Excelsior Institutional Trust;
Chairman of the Board (from 1997 to 1999),
President, Treasurer and Trustee of
Excelsior Funds (from 1995 to 1999); Vice
Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990 to
September 1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).
Donald L. Campbell Director Retired; Director of the Company and
333 East 69th Street Excelsior Tax-Exempt Funds, Inc. (since
Apt. 10-H 1984); Director of UST Master Variable
New York, NY 10021 Series, Inc. (from 1994 to June 1997); and
Age: 73 Trustee of Excelsior Institutional Trust
(since 1995).
Rodman L. Drake Director Director of the Company and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Funds, Inc. (since 1996);
1251 Avenue of the Americas, 9/th/ Floor Trustee, Excelsior Institutional Trust
New York, NY 10020 (since 1994); Trustee, Excelsior Funds
Age: 56 (from 1994 to 1999); Director, Parsons
Brinkerhoff, Inc. (engineering firm)
(since 1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment and
consulting firm) (1994 - 1997);
Chairman, MetroCashcard International,
Inc. (since 1999); Director, Hotelivision,
Inc. (since 1999); Director, Alliance
Group Services, Inc.
</TABLE>
- -----------------------
1 This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-32-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ----------------- ----------------------------------------
<S> <C> <C>
(since 1998); Director, Hyperion Total Return
Fund, Inc. and three other funds for which
Hyperion Capital Management, Inc. serves as
investment adviser (since 1991); Co-Chairman,
KMR Power Corporation (power plants) (from 1993
to 1996); Director, The Latin America Smaller
Companies Fund, Inc. (1993-1998); Member of Advisory
Board, Argentina Private Equity Fund L.P. (from 1992
to 1996) and Garantia L.P. (Brazil) (from 1993 to
1996); and Director, Mueller Industries, Inc. (from
1992 to 1994).
Joseph H. Dugan Director Retired; Director of the Company and
913 Franklin Lake Road Excelsior Tax-Exempt Funds, Inc. (since
Franklin Lakes, NJ 07417 1984); Director of UST Master Variable
Age: 74 Series, Inc. (from 1994 to June 1997); and
Trustee of Excelsior Institutional Trust
(since 1995).
Wolfe J. Frankl Director Retired; Director of
2320 Cumberland Road the Company and Excelsior
Charlottesville, VA 22901-7726 Tax-Exempt Funds, Inc. (since 1986);
Age: 79 Director of UST Master
Variable Series, Inc. (from 1994 to June
1997); Trustee of Excelsior Institutional
Trust (since 1995); Director, Deutsche
Bank Financial, Inc. (since 1989);
Director, The Harbus Corporation (since
1951); and Trustee, HSBC Funds Trust and
HSBC Mutual Funds Trust (since 1988).
Jonathan Piel Director Director of the Company and Excelsior
558 E. 87th Street Tax-Exempt Funds, Inc. (since 1996);
New York, NY 10128 Trustee of Excelsior Institutional Trust
Age: 60 (since 1994); Trustee of Excelsior Funds
(from 1994 to 1999); Vice President and
Editor, Scientific American, Inc. (from
1986 to 1994); Director, Group for The
South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee,
Knight Journalism Fellowships,
Massachusetts Institute of Technology
(since 1984).
Robert A. Robinson Director Director of the Company and Excelsior
Church Pension Group Tax-Exempt Funds, Inc. (since 1987);
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ----------------- ----------------------------------------
<S> <C> <C>
445 Fifth Avenue Director of UST Master Variable Series,
New York, NY 10016 Inc. (from 1994 to June 1997); Trustee of
Age: 73 Excelsior Institutional Trust (since
1995); President Emeritus, The Church
Pension Fund and its affiliated companies
(since 1966); Trustee, H.B. and F.H.
Bugher Foundation and Director of its
wholly owned subsidiaries - Rosiclear Lead
and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974 - 1998);
Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1982); and Director,
Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/2/ Director Retired; Director of the Company and
6549 Pine Meadows Drive Excelsior Tax-Exempt Funds, Inc. (since
Spring Hill, FL 34606 1985); Chairman of the Board of the
Age: 74 Company and Excelsior Tax-Exempt Funds,
Inc. (1991-1997) and Excelsior
Institutional Trust (1996-1997); President
and Treasurer of the Company and
Excelsior Tax-Exempt Funds, Inc.
(1994-1997) and Excelsior Institutional
Trust (1996-1997); Chairman of the Board,
President and Treasurer of UST Master
Variable Series, Inc. (1994-1997); and
Trustee of Excelsior Institutional Trust
(since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle
One Logan Square & Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 56
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle
One Logan Square & Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Global Funds Services Company (November
Services Company 1996 to present); and Officer
</TABLE>
- ---------------------------
2. This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-34-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
- ---------------- ----------------- ----------------------------------------
<S> <C> <C>
and Manager of Financial Reporting,
73 Tremont Street Investors Bank & Trust Company (January
Boston, MA 02108-3913 1991 to November 1996).
Age: 38
Patricia M. Leyne Assistant Treasurer Vice President, Senior Manager of Fund
Chase Global Funds Administration, Chase Global Funds
Services Company Services Company (since August 1999);
73 Tremont Street Assistant Vice President, Senior Manager
Boston, MA 02108-3913 of Fund Administration, Chase Global Funds
Age: 32 Services Company (from July 1998 to August
1999); Assistant Treasurer, Manager of
Fund Administration, Chase Global Funds
Services Company (from November 1996 to
July 1998); Supervisor, Chase Global Funds
Services Company (from September 1995 to
November 1996); Fund Administrator, Chase
Global Funds Services Company (from
February 1993 to September 1995).
</TABLE>
Each director of the Company receives an annual fee of $9,000 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to
receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners, receives
legal fees as counsel to the Company. The employees of CGFSC do not receive any
compensation from the Company for acting as officers of the Company. No person
who is currently an officer, director or employee of the Adviser serves as an
officer, director or employee of the Company. As of May 18, 2000, the
directors and officers of the Company as a group owned beneficially less than 1%
of the outstanding shares of each fund of the Company, and less than 1% of the
outstanding shares of all funds of the Company in the aggregate.
-35-
<PAGE>
The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Accrued as Annual from the Company
Aggregate Part of Benefits and Fund
Name of Compensation from Fund Upon Complex* Paid
Person/Position the Company Expenses Retirement to Directors
- ------------------------ ----------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Donald L. Campbell $ None None $ (3)**
Director
Rodman L. Drake $ None None $ (4)**
Director
Joseph H. Dugan $ None None $ (3)**
Director
Wolfe J. Frankl $ None None $ (3)**
Director
Jonathan Piel $ None None $ (4)**
Director
Robert A. Robinson $ None None $ (3)**
Director
Alfred C. Tannachion $ None None $ (3)**
Director
Frederick S. Wonham $ None None $ (3)**
Chairman of the Board,
President and Treasurer
</TABLE>
- --------------------------------
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund,
Excelsior Institutional Trust, and, until December 15, 1999, Excelsior
Funds.
** Number of investment companies in the Fund Complex for which director served
as director or trustee.
-36-
<PAGE>
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectus. The Adviser has also agreed to pay all expenses incurred by it
in connection with its activities under the agreements other than the cost of
securities, including brokerage commissions, purchased for the Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the International, Latin America, Pacific/Asia and Pan European Funds
pursuant to advisory agreements substantially similar to the Investment Advisory
Agreements currently in effect for such Funds.
For the services provided and expenses assumed pursuant to the
Investment Advisory Agreements, the Adviser is entitled to be paid a fee,
computed daily and paid monthly, at the annual rate of 1.00% of the average
daily net assets of each of the International, Latin America, Pacific/Asia and
Pan European Funds, and 1.25% of the average daily net assets of the Emerging
Markets Fund.
From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the Company paid
the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
International Fund $1,935,661 $1,591,051
Latin America Fund $ 374,039 $ 870,385
Pacific/Asia Fund $ 255,375 $ 686,528
Pan European Fund $1,868,811 $1,536,067
Emerging Markets Fund $ 26,108 $ 3,355
</TABLE>
-37-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Adviser voluntarily agreed to waive a portion of its advisory fee for certain
funds. During the periods stated, these waivers reduced advisory fees by the
following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
International Fund $203,778 $134,671
Latin America Fund $ 40,751 $ 94,398
Pacific/Asia Fund $ 26,291 $ 67,740
Pan European Fund $142,822 $119,690
Emerging Markets Fund $ 48,466 $ 8,751
</TABLE>
The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U. S. Trust New York and U. S. Trust Company shall be jointly, but not
severally, liable for a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for advisory services or a loss resulting
from willful misfeasance, bad faith or gross negligence in the performance of
their duties or from reckless disregard by them of their duties and obligations
thereunder. In addition, the Adviser has undertaken in the Investment Advisory
Agreements to maintain its policy and practice of conducting its Asset
Management Group independently of its Banking Group.
As discussed in the prospectus, U.S. Trust Corporation, parent of U.S.
Trust, and The Charles Schwab Corporation entered into a definitive agreement to
merge on January 12, 2000. After the merger, U.S. Trust Corporation will be a
wholly-owned subsidiary of Schwab. The merger is anticipated to close by July
2000; however, it is subject to a number of conditions, including certain
regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Funds
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreements (the
"Existing Agreement"). Accordingly, the shareholders of the Funds have been
asked to approve a new investment advisory agreement ("New Agreement") between
the Funds and U.S. Trust. If the merger is not consummated, the Funds will
operate under the New Agreement, which will become effective upon the date of
the termination of the merger agreement.
-38-
<PAGE>
The New Agreement contains substantially the same terms and conditions
as the Existing Agreements, and the advisory fee will remain the same under the
New Agreement.
CGFSC, Federated Administrative Services (an affiliate of the
Distributor) and U.S. Trust Company (together, the "Administrators") serve as
the Company's administrators and provide the Funds with general administrative
and operational assistance. Under the Administration Agreement, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income and realized capital gains or losses, if
any, of the respective Funds. The Administrators prepare semiannual reports to
the SEC, prepare federal and state tax returns, prepare filings with state
securities commissions, arrange for and bear the cost of processing share
purchase and redemption orders, maintain the Funds' financial accounts and
records, and generally assist in the Funds' operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Company's administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Company.
For the services provided to the Funds, the Administrators are jointly
entitled to a fee, computed daily and paid monthly, at the annual rate of 0.20%
of the average daily net assets of each Fund. From time to time, the
Administrators may voluntarily waive all or a portion of the administration fee
payable to them by a Fund, which waivers may be terminated at any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
International Fund $427,509 $344,846
Latin America Fund $ 81,572 $190,906
Pacific/Asia Fund $ 56,059 $150,789
Pan European Fund $397,805 $330,551
Emerging Markets Fund $ 11,814 $ 1,957
</TABLE>
-39-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
International Fund $ 379 $344,846
Latin America Fund $1,386 $190,906
Pacific/Asia Fund $ 274 $150,789
Pan European Fund $4,522 $330,551
Emerging Markets Fund $ 0 $ 1,957
</TABLE>
Shareholder Organizations
- -------------------------
The Company has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40% of the average daily net assets of the Fund's shares beneficially owned by
Customers of the Shareholder Organization. Such services may include: (a)
acting as recordholder of shares; (b) assisting in processing purchase, exchange
and redemption transactions; (c) transmitting and receiving funds in connection
wit Customer orders to purchase, exchange or redeem shares; (d) providing
periodic statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Company to Customers; and
(g) providing or arranging for the provision of other related services. It is
the responsibility of Shareholder Organizations to advise Customers of any fees
that they may charge in connection with a Customer's investment. Until further
notice, the Adviser and Administrators have voluntarily agreed to waive fees
payable by a Fund in an aggregate amount equal to administrative service fees
payable by that Fund.
The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company.
Pursuant to the Plan, the Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of the Company's
directors, including a
-40-
<PAGE>
majority of the directors who are not "interested persons" of the Company as
defined in the 1940 Act and have no direct or indirect financial interest in
such arrangements (the "Disinterested Directors").
Any material amendment to the Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Company's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Company's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the Company made payments
to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
International Fund
Latin America Fund
Pacific/Asia Fund
Pan European Fund
Emerging Markets Fund
</TABLE>
For the fiscal year ended March 31, 1999, the Company made payments
to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
International Fund $204,157 $202,445
Latin America Fund $ 42,137 $ 34,396
Pacific/Asia Fund $ 26,565 $ 24,951
Pan European Fund $147,344 $121,644
Emerging Markets Fund $ 11,666 $ 11,666
</TABLE>
-41-
<PAGE>
For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
International Fund $134,970 $133,194
Latin America Fund $ 96,449 $ 86,789
Pacific/Asia Fund $ 67,805 $ 67,453
Pan European Fund $120,297 $117,511
Emerging Markets Fund $ 994 $ 994
</TABLE>
Expenses
- --------
Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include:
taxes; interest; fees (including fees paid to the Company's directors and
officers who are not affiliated with the Distributor or the Administrators); SEC
fees; state securities qualifications fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent, and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; costs of independent pricing
services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions
in connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as the custodian of the Funds' assets.
Under the Custodian Agreement, Chase has agreed to: (i) maintain a separate
account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive all
income and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to the Company's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreement, notwithstanding any delegation. Communications
to the custodian should be directed to Chase, Mutual Funds Service Division, 3
Chase MetroTech Center, 8/th/ Floor, Brooklyn, NY 11245.
-42-
<PAGE>
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. For its transfer
agency, dividend-disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services. U.S. Trust New York is located at 114 W. 47/th/ Street, New York, New
York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. For the services
provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum
per account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Company's Board of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for the Funds.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rates may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Funds' portfolio
turnover rates.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed. In executing portfolio transactions for the Funds, the Adviser may use
affiliated brokers in accordance with the
-43-
<PAGE>
requirements of the 1940 Act. The Adviser may also take into account the sale of
Fund shares in allocating brokerage transactions.
During the last three fiscal years, the Company paid brokerage
commissions on behalf of each Fund, as shown in the table below:
<TABLE>
<CAPTION>
For the Fiscal Year Ended March 31:
Fund 2000 1999 1998
<S> <C> <C> <C>
International Fund........................................... $562,633 $456,367
Latin America Fund........................................... $198,226 $529,715
Pacific/Asia Fund............................................ $257,407 $470,122
Pan/European Fund............................................ $563,583 $384,700
Emerging Markets Fund........................................ $ 35,265 $ 15,112
</TABLE>
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, a Fund, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere. The cost of securities purchased from underwriters includes an
underwriting commission or concession.
The Investment Advisory Agreements between the Company and U.S. Trust
provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems 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 and
whether such broker or dealer is selling shares of the Company, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Company's Board
of Directors from time to time with respect to the extent and continuation of
the policy, to cause a Fund to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion.
Such brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy. Such services might also include reports on global, regional, and
country-by-country prospects for
-44-
<PAGE>
economic growth, anticipated levels of inflation, prevailing and expected
interest rates, and the outlook for currency relationships.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by U.S. Trust and does not
reduce the investment advisory fees payable by the Funds. Such information may
be useful to U.S. Trust in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to U.S. Trust in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Adviser, Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.
Investment decisions for each Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by U.S. Trust. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund and another
investment company or common trust fund, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which U.S.
Trust believes to be equitable to the Fund and such other investment company or
common trust fund. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
by the Fund. To the extent permitted by law, U.S. Trust may aggregate the
securities to be sold or purchased for the Funds with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 2000, the Funds did not hold any securities of the Company's regular
brokers or dealers or their parents.
PORTFOLIO VALUATION
-------------------
The Funds' portfolio securities, which are primarily traded on a
domestic exchange are valued at the last sale price on that exchange or, if
there is no recent sale, at the last current bid quotation. Portfolio
securities that are primarily traded on foreign securities exchanges are
generally valued at the preceding closing values of such securities on their
respective exchanges, except that when an event subsequent to the time when
value was so established is likely to have changed such value, then the fair
value of those securities will be determined by consideration of other factors
under the direction of the Board of Directors.
A security that is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. Investments in debt securities having a maturity of 60 days or
less are valued based upon the amortized cost
-45-
<PAGE>
method. An option, futures or foreign currency futures contract is valued at the
last sales price quoted on the principal exchange or board of trade on which
such option or contract is traded, or in the absence of a sale, the mean between
the last bid and asked prices. A forward currency contract is valued based on
the last published forward currency rate which reflects the duration of the
contract and the value of the underlying currency. All other foreign securities
are valued at the last current bid quotation if market quotations are available,
or at fair value as determined in accordance with guidelines adopted by the
Board of Directors. For valuation purposes, quotations of foreign securities in
foreign currency are converted to U.S. dollars equivalent at the prevailing
market rate on the day of conversion.
The Company's administrators have undertaken to price the securities
in each Fund's portfolio, and may use one or more independent pricing services
in connection with this service.
INDEPENDENT AUDITORS
--------------------
________________, independent auditors, ________________,
serve as auditors of the Company. The Funds' Financial Highlights included in
the Prospectus and the financial statements for the fiscal year ended March 31,
____ incorporated by reference in this Statement of Additional Information have
been audited by _______________ for the periods included in their reports
thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners), One
Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-6996,
is counsel to the Company.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
- ---------
The following supplements the tax information contained in the
Prospectus.
For federal income tax purposes, each Fund is treated as a separate
corporate entity and has qualified and intends to continue to qualify as a
regulated investment company. Such qualification generally relieves a Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, the Fund would be subject to federal tax on all
of its taxable income at
-46-
<PAGE>
regular corporate rates, without any deduction for distributions to
shareholders. In such event, dividend distributions would be taxable as ordinary
income to shareholders to the extent of such Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders. Moreover, if a Fund were to fail to make
sufficient distributions in a year, the Fund would be subject to corporate
income taxes and/or excise taxes in respect of the shortfall or, if the
shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses), if any. Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The tax principles applicable to transactions in financial instruments
and futures contacts and options that may be engaged in by a Fund, and
investments in passive foreign investment companies ("PFICs"), are complex and,
in some cases, uncertain. Such transactions and investments may cause a Fund to
recognize taxable income prior to the receipt of cash, thereby requiring the
Fund to liquidate other positions, or to borrow money, so as to make sufficient
distributions to shareholders to avoid corporate-level tax. Moreover, some or
all of the taxable income recognized may be ordinary income or short-term
capital gain, so that the distributions may be taxable to Shareholders as
ordinary income. In addition, in the case of any shares of a PFIC in which a
Fund invests, the Fund may be liable for corporate-level tax on any ultimate
gain or distributions on the shares if the Fund fails to make an election to
recognize income annually during the period of its ownership of the PFIC shares.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so either that they are not subject to backup withholding or that they are
"exempt recipients."
If the International Fund holds more than 50% of its assets in foreign
stock and securities at the close of its taxable year, the Fund may elect to
"pass through" to the Fund's shareholders foreign income taxes paid. If the
Fund so elects, shareholders will be required to treat their pro rata portion of
the foreign income taxes paid by the Fund as part of the amounts distributed to
them by the Fund and thus includable in their gross income for federal income
tax purposes. Shareholders who itemize deductions would then be allowed to
claim a deduction or credit (but not both) on their federal income tax returns
for such amounts, subject to certain limitations. Shareholders who do not
itemize deductions would (subject to such limitations) be able to claim a credit
but not a deduction.
-47-
<PAGE>
No deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the International Fund does not qualify or elect to
"pass through" to the Fund's shareholders foreign income taxes paid,
shareholders will not be able to claim any deduction or credit for any part of
the foreign income taxes paid by the Fund.
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state, local and/or foreign taxes.
PERFORMANCE INFORMATION
-----------------------
The Funds may advertise the "average annual total return" for their
shares. Such total return figure reflects the average percentage change in the
value of an investment in a Fund from the beginning date of the measuring period
to the end of the measuring period. Average total return figures will be given
for the most recent one-year period, and may be given for other periods as well
(such as from the commencement of a Fund's operations, or on a year-by-year
basis). The average annual total return is computed by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:
T = [(ERV/1/n/) - 1]
----------
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the applicable
period (or a fractional portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
years.
Each Fund may also advertise the "aggregate total return" for its
shares for various periods, representing the cumulative change in the value of
an investment in the Fund for the specific period. The aggregate total return
is computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate
total return is as follows:
-48-
<PAGE>
Aggregate Total Return = [(ERV) - 1]
-----
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in a Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Based on the foregoing calculations, the average annual total returns
for the period from the commencement of operations (December 31, 1992) until
March 31, 2000 and the one - and five - year periods ended March 31, 2000
for each of the Funds were as follows:
<TABLE>
<CAPTION>
Average Annual Total Returns
--------------------------------------------------------------------
For the Period from
For the Year Ended For the 5 Years Ended December 31, 1992
3/31/00 3/31/00 until 3/31/00
------------------ --------------------- -------------------
<S> <C> <C> <C>
International Fund
Latin America Fund
Pacific/Asia Fund
Pan European Fund
Emerging Markets Fund* N/A N/A
</TABLE>
*Commenced operation on January 2, 1998
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formulas set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.
-49-
<PAGE>
The total return of shares of a Fund may be compared to that of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. Total return and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
----- -------- ------ -------- --- ---- ------ -------
and The New York Times, or in publications of a local or regional nature, may
--- --- ---- -----
also be used in comparing the performance of a Fund. Advertisements, sales
literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and techniques that together with market
conditions and events, materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisements, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
Performance will fluctuate and any quotation of performance should not
be considered as representative of a Fund's future performance. Shareholders
should remember that performance is generally a function of the kind and quality
of the instruments held in a portfolio, operating expenses, and market
conditions. Any fees charged by Shareholder Organizations with respect to
accounts of Customers that have invested in shares will not be included in
calculations of performance.
-50-
<PAGE>
CODE OF ETHICS
The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics that allow for personnel subject to the codes to
invest in securities, including securities that may be purchased or held by the
Funds.
MISCELLANEOUS
-------------
As used herein, "assets allocable to the Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company not belonging to a particular portfolio of the Company. In
determining a Fund's net asset value, assets allocable to the Fund are charged
with the direct liabilities in respect of the Fund and with a share of the
general liabilities of the Company which are normally allocated in proportion to
the relative asset values of the Company's portfolios at the time of allocation.
Subject to the provisions of the Company's Charter, determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets with respect to a particular Fund, are conclusive.
As of May 18, 2000, U.S. Trust and its affiliates held of record
substantially all of the Funds' outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
As of May 18, 2000, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding shares
of a Fund were as follows: INTERNATIONAL FUND: U.S. Trust Retirement Fund, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 7.30%; LATIN AMERICA FUND: U.S. Trust Retirement Fund, c/o United
States Trust Company of New York, 114 West 47th Street, New York, New York
10036, 5.77%; and Charles Schwab & Co. Inc., Special Custody A/C for, Attn:
Mutual Funds, 101 Montgomery Street, San Francisco, California 94104, 6.78%;
EMERGING MARKETS FUND: U.S. Trust Retirement Fund, c/o United States Trust
Company of New York, 114 West 47th Street, New York, New York 10036, 11.87%.
-51-
<PAGE>
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, _____ (the
"___ Annual Report") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the ____ Annual Report
are incorporated by reference herein. The financial statements included in the
______ Annual Report for the Funds have been audited by the Company's
independent auditors, _____________, whose reports thereon also appear in the
_____ Annual Report and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the _____ Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
-52-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion
of the creditworthiness of an obligor with respect to financial obligations
having an original maturity of no more than 365 days. The following summarizes
the rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D" rating will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own
A-1
<PAGE>
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating categories.
The three rating categories of Duff & Phelps for investment grade commercial
paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps employs
three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
A-2
<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
"D-3" - Debt possesses satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
"B" - Securities possess speculative credit quality. This designation
indicates uncertain capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates a
capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
A-3
<PAGE>
Thomson Financial BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for corporate and
municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
A-4
<PAGE>
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"c" - The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while
A-5
<PAGE>
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks.
Examples of such obligations are securities with principal or interest return
indexed to equities, commodities, or currencies; certain swaps and options;
and interest-only and principal-only mortgage securities. The absence of an
"r" symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
The following summarizes the ratings used by Moody's for corporate and municipal
long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds 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 risk appear somewhat larger than in the "Aaa" securities.
"A" - Bonds 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 are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate
A-6
<PAGE>
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff & Phelps for
corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable in periods of greater economic stress.
"BBB" - Debt possesses below-average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles. This is the lowest
investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
A-7
<PAGE>
To provide more detailed indications of credit quality, the "AA," "A," "BBB,"
"BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that there
is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
A-8
<PAGE>
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% -
90%, and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA ratings
from and including "AA" to "CCC" may be modified by the addition of a plus (+)
or minus (-) sign to denote relative standing within these major rating
categories.
"NR" indicates the Fitch IBCA does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively
short period.
Thomson Financial BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal and
interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
A-9
<PAGE>
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category and
indicates an acceptable capacity to repay principal and interest. Issues rated
"BBB" are more vulnerable to adverse developments (both internal and external)
than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a plus
or minus sign designation which indicates where within the respective category
the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to pay
principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
A-10
<PAGE>
"SP-3" - The issuers of these municipal notes exhibit speculative capacity to
pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
The following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection that are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" -This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
EXCELSIOR FUNDS, INC.
Energy and Natural Resources Fund
Real Estate Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the Energy and Natural
Resources Fund and Real Estate Fund (individually, a "Fund" and collectively,
the "Funds") of Excelsior Funds, Inc. dated August 1, 2000 (the "Prospectus").
A copy of the Prospectus may be obtained by writing Excelsior Funds, Inc. c/o
Chase Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or
by calling (800) 446-1012. Capitalized terms not otherwise defined have the
same meaning as in the Prospectus.
The audited financial statements and related report of __________________,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, _____ are incorporated herein by reference
in the section entitled "Financial Statements." No other parts of the annual
report are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY................................................ 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS............................... 1
Investment Philosophy and Strategies................................. 1
Additional Investment Policies -- Energy and Natural Resources Fund.. 1
Additional Investment Policies -- Real Estate Fund................... 3
Additional Information on Portfolio Instruments...................... 5
Investment Limitations............................................... 16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 19
Distributor.......................................................... 19
Purchase of Shares................................................... 19
Redemption Procedures................................................ 20
Other Redemption Information......................................... 21
INVESTOR PROGRAMS......................................................... 22
Systematic Withdrawal Plan........................................... 22
Exchange Privilege................................................... 23
Retirement Plans..................................................... 23
Automatic Investment Program......................................... 24
Additional Information............................................... 24
DESCRIPTION OF CAPITAL STOCK.............................................. 25
MANAGEMENT OF THE FUNDS................................................... 27
Directors and Officers............................................... 27
Investment Advisory and Administration Agreements.................... 32
Shareholder Organizations............................................ 35
Expenses............................................................. 37
Custodian and Transfer Agent......................................... 37
PORTFOLIO TRANSACTIONS.................................................... 38
PORTFOLIO VALUATION....................................................... 41
INDEPENDENT AUDITORS...................................................... 42
COUNSEL................................................................... 42
ADDITIONAL INFORMATION CONCERNING TAXES................................... 42
PERFORMANCE INFORMATION................................................... 43
</TABLE>
<PAGE>
<TABLE>
<S> <C>
CODE OF ETHICS............................................................ 47
MISCELLANEOUS............................................................. 47
FINANCIAL STATEMENTS...................................................... 48
APPENDIX A................................................................ A-1
</TABLE>
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. Each Fund is a separate series of the Company and is
classified as non-diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company was organized as a Maryland corporation
on August 2, 1984. Prior to December 28, 1995, the Company was known as "UST
Master Funds, Inc." Prior to August 18, 1997, the Energy and Natural Resources
Fund was known as the Long-Term Supply of Energy Fund.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------
The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of the Energy and Natural Resources Fund
may not be changed without the vote of the holders of a majority of its
outstanding shares (as defined below). The investment objective of the Real
Estate Fund may be changed without shareholder approval. Except as expressly
noted below, each Fund's investment policies may be changed without shareholder
approval.
Investment Philosophy and Strategies
- ------------------------------------
In managing investments for the Funds, the Adviser follows a long-term
investment philosophy which generally does not change with the short-term
variability of financial markets or fundamental conditions. Its approach begins
with the conviction that all worthwhile investments are grounded in value. The
Adviser believes that an investor can identify fundamental values that
eventually should be reflected in market prices, such that over time, a
disciplined search for fundamental value will achieve better results than
attempting to take advantage of short-term price movements.
The Adviser's investment philosophy is to identify investment values
available in the market at attractive prices. Investment value arises from the
ability to generate earnings or from the ownership of assets or resources.
Underlying earnings potential and asset values are frequently demonstrable but
not recognized in the market prices of the securities representing their
ownership.
Additional Investment Policies -- Energy and Natural Resources Fund
- -------------------------------------------------------------------
Under normal market conditions, at least 65% of the Energy and Natural
Resources Fund's total assets will be invested in the securities of companies
that are in the energy and other natural resources groups of industries. Energy
and natural resources encompass a number of traditional industry
classifications, including among others: mining of metals, coal and other
minerals; oil and gas extraction; production of petroleum, coal and newer
resources such as geothermal and solar energy; pipeline companies; and
agricultural industries including crops, livestock, and forestry and timberland.
Normally, investments in energy companies will constitute a substantial portion
of these investments, and at least 25% of the Fund's total assets will be
invested in crude oil, petroleum and natural gas companies. This policy
reflects the
-1-
<PAGE>
Adviser's belief that these hydrocarbon resources represent the primary
component of world energy needs. However, the amount may be reduced if there
are changes in governmental regulations, world economic and political events,
exploration or production spending, supply, demand or prices of crude oil,
petroleum, natural gas or other energy sources, and in the Adviser's opinion,
such changes would have an adverse affect on the securities of such companies.
The Fund's concentration in companies that are in the energy and other
natural resources groups of industries subjects it to certain risks. The value
of equity securities of such companies will fluctuate pursuant to market
conditions, generally, as well as the market for the particular natural resource
in which the issuer is involved. Furthermore, the values of natural resources
are affected by numerous factors including events occurring in nature and
international politics. For instance, events in nature (such as earthquakes or
fires in prime natural resources areas) and political events (such as coups or
military confrontations) can affect the overall supply of a natural resource and
thereby the value of companies involved in such natural resource. In addition,
inflationary pressures and rising interest rates may affect the demand for
certain natural resources such as timber. Accordingly, the Fund may shift its
emphasis from one natural resources industry to another depending on prevailing
trends or developments.
As noted above, the Fund expects to invest a substantial portion of
its assets in energy companies. Energy-related investments are affected
generally by supply, demand, and other competitive factors for the companies'
specific products and services. They are also affected by unpredictable factors
such as the supply and demand for oil, gas, electricity and other energy
sources, prices of such energy sources, exploration and production spending,
governmental regulation, and world economic and political events. In addition,
utilities firms in the energy field are subject to a variety of factors
affecting the public utilities industries, including: difficulty obtaining
adequate returns on invested capital which are typically subject to the control
and scrutiny of public service commissions; restrictions on operations and
increased costs and delays as a result of environmental considerations; costs of
and ability to secure financing for large construction and development projects;
difficulties in obtaining secure energy resources; the uncertain effects of
conservation efforts; and a variety of issues concerning financing, governmental
approval and environmental aspects of nuclear power facilities.
The Fund may invest up to 35% of its total assets in gold and other
precious metal bullion and coins ("precious metals"). Precious metals will only
be bought from and sold to banks (both U.S. and foreign), and dealers who are
members of, or affiliated with members of, a regulated U.S. commodities
exchange, in accordance with applicable investment laws. Precious metal bullion
will not be purchased in any form that is not readily marketable. Coins will
not be purchased for their numismatic value and will not be considered for the
Fund it they cannot be bought or sold in an active market. Any bullion or coins
purchased by the Fund will be delivered to and stored with a qualified custodian
bank in the United States. Investors should be aware that precious metals do
not generate income, offering only the potential for capital appreciation and
depreciation, and may subject the Fund to higher custody and transaction costs
than those normally associated with the ownership of securities. Investments
relating to precious metals are considered speculative.
-2-
<PAGE>
In addition to its authority to purchase precious metals, the Fund may
invest to a significant degree in companies in the precious metals industry.
Investments related to precious metals are considered speculative and are
affected by a variety of worldwide economic, financial and political factors.
Prices of precious metals may fluctuate sharply over short periods due to
several factors, including: changes in inflation or expectations regarding
inflation in various countries; currency fluctuations; metal sales by
governments, central banks or international agencies; investment speculation;
changes in industrial and commercial demand; and governmental prohibitions or
restrictions on the private ownership of certain precious metals. Under current
federal tax law, the Fund would fail to qualify as a regulated investment
company if its gains from the sale or other disposition of precious metals were
to exceed 10% of the Fund's annual gross income. Therefore, this limitation may
cause the Fund to hold or sell precious metals or securities when it would not
otherwise be advantageous to do so.
At present, South Africa, the United States, Australia, Canada and the
Commonwealth of Independent States (which includes Russia and certain other
countries that were part of the former Soviet Union) are the five major
producers of gold bullion. Therefore, political and economic conditions in
these and other gold-producing countries may pose certain risks to the Fund's
investments in gold and gold-related companies. These include the effect of
social and political unrest on mining production and gold prices, as well as the
threat of nationalization or expropriation by the various governments involved.
Additional Investment Policies -- Real Estate Fund
- --------------------------------------------------
Under normal market conditions, at least 65% of the Real Estate Fund's
total assets will be invested in companies principally engaged in the real
estate business, such as real estate investment trusts ("REITs"), real estate
developers, mortgage lenders and servicers, construction companies and building
material suppliers. A company is "principally engaged" in the real estate
business if, at the time of investment, the company derives at least 50% of its
revenues from the ownership, construction, financing, management or sale of
commercial, industrial or residential real estate, or that such company has at
least 50% of its assets in such real estate.
It is expected that the Fund will invest a majority of its assets in
shares of REITs during normal market and economic conditions. REITs pool
investors' funds for investment primarily in income-producing real estate or
real estate related loans or interests. Unlike corporations, REITs do not have
to pay income taxes if they meet certain requirements of the Internal Revenue
Code of 1986, as amended (the "Code"). To qualify, a REIT must distribute at
least 95% of its taxable income to its shareholders and receive at least 75% of
that income from rents, mortgages and sales of property.
REITs can generally be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rental and lease payments.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs make loans to commercial real estate
developers and derive their income primarily from interest payments on such
loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs.
-3-
<PAGE>
Although the Fund will not invest in real estate directly, it is
subject to the same risks that are associated with the direct ownership of real
estate. In general, real estate values are affected by a variety of factors,
including: supply and demand for properties; the economic health of the
country, different regions and local markets; and the strength of specific
industries renting properties. An equity REIT's performance ultimately depends
on the types and locations of the properties it owns and on how well it manages
its properties. For instance, rental income could decline because of extended
vacancies, increased competition from nearby properties, tenants' failure to pay
rent, or incompetent management. Property values could decrease because of
overbuilding, environmental liabilities, uninsured damages caused by natural
disasters, a general decline in the neighborhood, rent controls, losses due to
casualty or condemnation, increases in property taxes and/or operating expenses,
or changes in zoning laws or other factors.
Changes in interest rates could affect the performance of REITs. In
general, during periods of rising interest rates, REITs may lose some of their
appeal to investors who may be able to obtain higher yields from other income-
producing investments, such as long-term bonds. Higher interest rates may also
mean that it is more expensive to finance property purchases, renovations and
improvements, which could hinder a REIT's performance. During periods of
declining interest rates, certain mortgage REITs may hold mortgages that the
mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by such mortgage REITs.
While equity REITs are affected by changes in the value of the
underlying properties they own, mortgage REITs are affected by changes in the
value of the properties to which they have extended credit. REITs may not be
diversified and are subject to the risks involved with financing projects.
REITs may also be subject to substantial cash flow dependency and self-
liquidation. In addition, REITs could possibly fail to qualify for tax-free
pass-through of income under the Code or to maintain their exemptions from
registration under the 1940 Act.
Such factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to a REIT. In the event of a default by a
borrower or lessee, a REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
its investments.
Under certain circumstances the Fund could own real estate directly as
a result of a default on debt securities it owns. If the Fund has rental income
or income from the direct disposition of real property, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company.
* * *
Under normal market and economic conditions, the Energy and Natural
Resources and Real Estate Funds will invest at least 65% of their total assets
in common stock, preferred stock and securities convertible into common stock.
Normally, up to 35% of each
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Fund's total assets may be invested in other securities and instruments
including, e.g., other investment-grade debt securities (i.e., debt obligations
classified within the four highest ratings of a nationally recognized
statistical rating organization such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") or, if unrated,
determined by the Adviser to be of comparable quality), warrants, options and
futures instruments as described in more detail below. During temporary
defensive periods or when the Adviser believes that suitable stocks or
convertible securities are unavailable, each Fund may hold cash and/or invest
some or all of its assets in U.S. government securities, high-quality money
market instruments and repurchase agreements collateralized by the foregoing
obligations.
Portfolio holdings will include equity securities of companies having
capitalizations of varying amounts, and the Funds may invest in the securities
of high growth, small companies when the Adviser expects earnings and the price
of the securities to grow at an above-average rate. Certain securities owned by
the Funds may be traded only in the over-the-counter market or on a regional
securities exchange, may be listed only in the quotation service commonly known
as the "pink sheets," and may not be traded every day or in the volume typical
of trading on a national securities exchange. As a result, there may be a
greater fluctuation in the value of a Fund's shares, and a Fund may be required,
in order to satisfy redemption requests or for other reasons, to sell these
securities at a discount from market prices, to sell during periods when such
disposition is not desirable, or to make many small sales over a period of time.
The Funds may invest in the securities of foreign issuers directly or
indirectly through sponsored and unsponsored American Depository Receipts
("ADRs"). ADRs represent receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities of foreign issuers.
The Energy and Natural Resources Fund may also invest in sponsored and
unsponsored European Depository Receipts ("EDRs") and Global Depository Receipts
("GDRs"). EDRs are receipts issued in Europe typically by non-U.S. banks or
trust companies and foreign branches of U.S. banks which evidence ownership of
foreign or U.S. securities. GDRs are receipts structured similarly to EDRs and
are marketed globally. ADRs may be listed on a national securities exchange or
may be traded in the over-the-counter market. EDRs are designed for use in
European exchange and over-the-counter markets. GDRs are designed for trading
in non-U.S. securities markets. ADRs, EDRs and GDRs traded in the over-the-
counter market which do not have an active or substantial secondary market will
be considered illiquid and therefore will be subject to a Fund's limitation with
respect to such securities. ADR prices are denominated in U.S. dollars although
the underlying securities are denominated in a foreign currency. Investments in
ADRs, EDRs and GDRs involve risks similar to those accompanying direct
investments in foreign securities.
Additional Information on Portfolio Instruments
- -----------------------------------------------
Options
-------
The Funds may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation. Such
purchases would be in an amount not exceeding 5% of each such Fund's net assets.
Such options may relate to particular securities or to various stock and bond
indices. Purchase of options is a highly specialized
-5-
<PAGE>
activity which entails greater than ordinary investment risks, including a
substantial risk of a complete loss of the amounts paid as premiums to the
writer of the options. Regardless of how much the market price of the
underlying security increases or decreases, the option buyer's risk is limited
to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying securities, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities. A listed
call option gives the purchaser of the option the right to buy from a clearing
corporation, and the writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking
the obligations under the option contract. A listed put option gives the
purchaser the right to sell to a clearing corporation the underlying security
at the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security. Put and call options
purchased by the Funds will be valued at the last sale price or, in the absence
of such a price, at the mean between bid and asked prices.
Each Fund may engage in writing covered call options (options on
securities owned by the particular Fund) and enter into closing purchase
transactions with respect to such options. Such options must be listed on a
national securities exchange and issued by the Options Clearing Corporation.
The aggregate value of the securities subject to options written by each Fund
may not exceed 25% of the value of its net assets. By writing a covered call
option, a Fund forgoes the opportunity to profit from an increase in the market
price of the underlying security above the exercise price except insofar as the
premium represents such a profit, and it will not be able to sell the underlying
security until the option expires or is exercised or the Fund effects a closing
purchase transaction by purchasing an option of the same series.
When a Fund writes a covered call option, it may terminate its
obligation to sell the underlying security prior to the expiration date of the
option by executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the writer will have
incurred a loss on the transaction. An option position may be closed out only
on an exchange which provides a secondary market for an option of the same
series. There is no assurance that a liquid secondary market on an exchange
will exist for any particular option. A covered option writer, unable to effect
a closing purchase transaction, will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer in such circumstances will be subject to the
risk of market decline in the underlying security during such period. A Fund
will write an option on a particular security only if the Adviser believes that
a liquid secondary market will exist on an exchange for options of the same
series, which will permit the Fund to make a closing purchase transaction in
order to close out its position.
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<PAGE>
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date, or if the Fund involved enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold),
and the deferred credit related to such option will be eliminated. If an option
is exercised, the Fund involved may deliver the underlying security from its
portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Fund involved will realize a gain or loss. Premiums from
expired call options written by the Funds and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. The use of covered call options is not a primary investment technique
of the Funds and such options will normally be written on underlying securities
as to which the Adviser does not anticipate significant short-term capital
appreciation.
Repurchase Agreements
---------------------
Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds'
custodian (or sub-custodian) or in the Federal Reserve/Treasury book-entry
system. The seller under a repurchase agreement will be required to maintain
the value of the securities which are subject to the agreement and held by a
Fund at not less than the repurchase price. Default or bankruptcy of the seller
would, however, expose a Fund to possible delay in connection with the
disposition of the underlying securities or loss to the extent that proceeds
from a sale of the underlying securities were less than the repurchase price
under the agreement. Repurchase agreements are considered loans by a Fund under
the 1940 Act.
Futures Contracts and Related Options
-------------------------------------
Each Fund may invest in futures contracts and options thereon. They
may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on
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<PAGE>
recognized exchanges or in other established financial markets. A futures
contract on foreign currency creates a binding obligation on one party to
deliver, and a corresponding obligation on another party to accept delivery of,
a stated quantity of a foreign currency for an amount fixed in U.S. dollars.
Foreign currency futures, which operate in a manner similar to interest rate
futures contracts, may be used by the Funds to hedge against exposure to
fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.
Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with a Fund's securities investments. The Funds
will engage in futures transactions only to the extent permitted by the
Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange
Commission ("SEC"). When investing in futures contracts, the Funds must satisfy
certain asset segregation requirements to ensure that the use of futures is
unleveraged. When a Fund takes a long position in a futures contract, it must
maintain a segregated account containing liquid assets equal to the purchase
price of the contract, less any margin or deposit. When a Fund takes a short
position in a futures contract, the Fund must maintain a segregated account
containing liquid assets in an amount equal to the market value of the
securities underlying such contract (less any margin or deposit), which amount
must be at least equal to the market price at which the short position was
established. Asset segregation requirements are not applicable when a Fund
"covers" an options or futures position generally by entering into an offsetting
position. Each Fund will limit its hedging transactions in futures contracts
and related options so that, immediately after any such transaction, the
aggregate initial margin that is required to be posted by the Fund under the
rules of the exchange on which the futures contract (or futures option) is
traded, plus any premiums paid by the Fund on its open futures options
positions, does not exceed 5% of the Fund's total assets, after taking into
account any unrealized profits and unrealized losses on the Fund's open
contracts (and excluding the amount that a futures option is "in-the-money" at
the time of purchase). An option to buy a futures contract is "in-the-money" if
the then-current purchase price of the underlying futures contract exceeds the
exercise or strike price; an option to sell a futures contract is "in-the-money"
if the exercise or strike price exceeds the then-current purchase price of the
contract that is the subject of the option. In addition, the use of futures
contracts is further restricted to the extent that no more than 10% of a Fund's
total assets may be hedged.
Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge.
Transactions in futures as a hedging device may subject a Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the
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<PAGE>
possibility of a decline in the market adversely affecting securities held by
it and securities prices increase instead, the Fund will lose part or all of
the benefit to the increased value of its securities which it has hedged
because it will have approximately equal offsetting losses in its futures
positions. There may be an imperfect correlation, or no correlation at all,
between movements in the price of the futures contracts (or options) and
movements in the price of the instruments being hedged. In addition,
investments in futures may subject a Fund to losses due to unanticipated market
movements which are potentially unlimited. Further, there is no assurance that
a liquid market will exist for any particular futures contract (or option) at
any particular time. Consequently, a Fund may realize a loss on a futures
transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements. In addition, in some
situations, if a Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market.
As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions involves the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom such
Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
-9-
<PAGE>
Options on Futures Contracts
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the instruments
being hedged, an option may or may not be less risky than ownership of the
futures contract or such instruments. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). Although permitted by
their fundamental investment policies, the Funds do not currently intend to
write futures options, and will not do so in the future absent any necessary
regulatory approvals.
When-Issued and Forward Transactions
------------------------------------
Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
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<PAGE>
It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days.
The Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Forward Currency Transactions
-----------------------------
Each Fund will conduct its currency exchange transactions either on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange markets,
or by entering into forward currency contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. In this respect, forward currency contracts are
similar to foreign currency futures contracts; however, unlike futures contracts
which are traded on recognized commodities exchange, forward currency contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. Also, forward currency
contracts usually involve delivery of the currency involved instead of cash
payment as in the case of futures contracts.
A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose
of transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Funds will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
the Fund's assets, but will be employed as necessary to correspond to particular
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<PAGE>
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable
when the Fund "covers" a forward currency position generally by entering into an
offsetting position.
The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
Securities Lending
------------------
To increase return on its portfolio securities, each Fund may lend its
portfolio
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<PAGE>
securities to broker/dealers pursuant to agreements requiring the loans to be
continuously secured by collateral equal at all times in value to at least the
market value of the securities loaned. Collateral for such loans may include
cash, securities of the U.S. government, its agencies or instrumentalities, or
an irrevocable letter of credit issued by a bank, or any combination thereof.
Such loans will not be made if, as a result, the aggregate of all outstanding
loans of a Fund exceeds 30% of the value of its total assets. When a Fund lends
its securities, it continues to receive interest or dividends on the securities
lent and may simultaneously earn interest on the investment of the cash loan
collateral, which will be invested in readily marketable, high- quality,
short-term obligations. Although voting rights, or rights to consent,
attendant to lent securities pass to the borrower, such loans may be called at
any time and will be called so that the securities may be voted by a Fund if a
material event affecting the investment is to occur.
There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.
Money Market Instruments
------------------------
The Funds may invest in "money market instruments," which include,
among other things, bank obligations, commercial paper and corporate bonds with
remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations also
include U.S. dollar-denominated obligations of foreign branches of U.S. banks
and obligations of domestic branches of foreign banks. Investments in bank
obligations of foreign branches of domestic financial institutions or of
domestic branches of foreign banks are limited so that no more than 5% of the
value of a Fund's total assets may be invested in any one branch, and no more
than 20% of a particular Fund's total assets at the time of purchase may be
invested in the aggregate in such obligations (see investment limitation No. 17
below under "Investment Limitations"). Investments in time deposits are limited
to no more than 5% of the value of a Fund's total assets at the time of
purchase.
Investments by the Funds in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire unrated commercial paper that is determined by
the Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Fund.
Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by a Fund, the Fund may, from time to time as specified in
the instrument, demand payment of the
-13-
<PAGE>
principal of the instrument or may resell the instrument to a third party. The
absence of an active secondary market, however, could make it difficult for a
Fund to dispose of the instrument if the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for this or other reasons, suffer a loss
with respect to such instrument.
Government Obligations
----------------------
Each Fund may invest in U.S. government obligations, including U.S.
Treasury Bills and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, the
Farmers Home Administration, the Export-Import Bank of the United States, the
Small Business Administration, the Government National Mortgage Association, the
Federal National Mortgage Association, the General Services Administration, the
Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks and the Maritime Administration.
Investment Company Securities
-----------------------------
Each Fund may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by each Fund within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition against a Fund
investing more than 10% of the value of its total assets in such securities.
[Each Fund may invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a
Creation Unit. The liquidity of small holdings of SPDRs, therefore, will depend
upon the existence of a secondary market. Upon redemption of a Creation Unit,
the Fund will receive Index Securities and cash identical to the Portfolio
Deposit required of an investor wishing to
-14-
<PAGE>
purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of
a SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.]
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The SEC views reverse repurchase agreements as a form
of borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price of those securities.
Illiquid Securities
-------------------
Neither Fund will knowingly invest more than 15% of the value of its
net assets in securities that are illiquid. A security will be considered
illiquid if it may not be disposed of within seven days at approximately the
value at which the particular Fund has valued the security. Each Fund may
purchase securities which are not registered under the Securities Act of 1933,
as amended (the "Act"), but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Act. Any such security will not
be considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.
Portfolio Turnover
------------------
Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
the investment objective of the particular Fund. Portfolio investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover may involve correspondingly
greater brokerage commission expenses and other transaction costs, which must be
borne directly by a Fund and ultimately by its shareholders. High portfolio
turnover may result in the realization of substantial net capital gains. To the
extent net short-term capital gains are realized, any distributions resulting
from such gains are considered ordinary income for federal income tax purposes.
(See "Additional Information Concerning Taxes.")
-15-
<PAGE>
Investment Limitations
- ----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a
Fund only by a vote of the holders of a majority of such Fund's outstanding
shares. As used herein, a "vote of the holders of a majority of the outstanding
shares" of the Company or a particular Fund means, with respect to the approval
of an investment advisory agreement or a change in a fundamental investment
policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Company or such Fund, or (b) 67% or more of the shares
of the Company or such Fund present at a meeting if more than 50% of the
outstanding shares of the Company or such Fund are represented at the meeting in
person or by proxy. Investment limitations which are "operating policies" with
respect to a Fund may be changed by the Company's Board of Directors without
shareholder approval.
The following investment limitations are fundamental with respect to
each of the Funds. Each Fund may not:
1. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) the
Energy and Natural Resources Fund may lend portfolio securities in an amount not
exceeding 30% of its total assets, and (iii) the Real Estate Fund may lend
portfolio securities in accordance with its investment objective and policies;
and
2. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (i) with respect to the Energy and Natural
Resources Fund, there is no limitation with respect to securities of companies
in the energy and other natural resources groups of industries or securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
and (ii) with respect to the Real Estate Fund: (a) the Fund will concentrate
its investments in the securities of issuers principally engaged in the real
estate business, (b) there is no limitation with respect to securities issued or
guaranteed by the U.S. government, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and repurchase agreements secured
by such securities, and (c) neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for purposes of
this policy.
The following investment limitations are fundamental with respect to
the Energy and Natural Resources Fund. The Fund may not:
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
4. Purchase or sell real estate, except that the Fund may purchase
securities of
-16-
<PAGE>
issuers which deal in real estate and may purchase securities which are secured
by interests in real estate;
5. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitation contained in the Prospectus
might be considered to be the issuance of a senior security;
6. Purchase or sell commodities or invest in oil, gas, or other
mineral exploration or development programs; provided, however, that the Fund
may, in accordance with its investment objective and policies, (i) purchase
publicly traded securities of companies engaging in whole or in part in such
activities or invest in liquidating trust receipts, certificates of beneficial
ownership or other instruments, (ii) enter into commodity futures contracts and
other futures contracts, (iii) enter into options on commodities and futures
contracts, (iv) invest in gold and other precious metal bullion and coins, and
(v) enter into forward contracts on foreign currencies and precious metals; and
7. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) The Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding. Optioned stock held in escrow is not deemed to be a
pledge.
The following investment limitations are operating policies with
respect to the Energy and Natural Resources Fund. The Fund may not:
8. Purchase securities on margin, make short sales of securities, or
maintain a short position;
9. Invest in companies for the purpose of exercising management or
control; and
10. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
The following investment limitations are fundamental with respect to
the Real Estate Fund. The Fund may not:
11. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act. Optioned stock held in escrow is
not deemed to be a pledge;
12. Act as an underwriter of securities within the meaning of the
Securities
-17-
<PAGE>
Act of 1933, except insofar as it might be deemed to be an underwriter upon
disposition of certain portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase
of obligations directly from the issuer thereof in accordance with its
investment objective, policies and limitations may be deemed to be
underwriting;
13. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;
14. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and
15. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that the Fund may: (a) purchase publicly traded securities
of companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.
The following investment limitations are operating policies with
respect to the Real Estate Fund. The Fund may not:
16. Purchase securities on margin, make short sales of securities, or
maintain a short position;
17. Invest in companies for the purpose of exercising management or
control; and
18. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
* * *
The Funds may not invest in obligations of foreign branches of
financial institutions or in domestic branches of foreign banks if immediately
after such purchase (i) more than 5% of the value of their respective total
assets would be invested in obligations of any one foreign branch of the
financial institution or domestic branch of a foreign bank; or (ii) more than
20% of their respective total assets would be invested in foreign branches of
financial institutions or in domestic branches of foreign banks. In addition,
the Real Estate Fund will not purchase portfolio securities while borrowings in
excess of 5% of its total assets are outstanding. These investment policies may
be changed by the Company's Board of Directors without shareholder approval.
-18-
<PAGE>
For the purpose of Investment Limitation Nos. 4 and 13, the
prohibition of purchases of real estate includes acquisition of limited
partnership interests in partnerships formed with a view toward investing in
real estate, but does not prohibit purchases of shares in real estate investment
trusts.
In addition to the above investment limitations, each Fund currently
intends to refrain from entering into arbitrage transactions.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's investments will not constitute a violation of such limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Company's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Purchase of Shares
Shares of the Funds are offered for sale at their net asset value
per share next computed after a purchase request is received in good order by
the Company's sub-
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<PAGE>
transfer agent or by an authorized broker or designated intermediary. The
Distributor has established several procedures for purchasing shares in order
to accommodate different types of investors.
Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.
Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Company. A Shareholder
Organization may elect to hold of record shares for its Customers and to record
beneficial ownership of shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility
to transmit to the Distributor all purchase requests for its Customers and to
transmit, on a timely basis, payment for such requests to Chase Global Funds
Services Company ("CGFSC"), the Funds' sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases (and redemptions) will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a
Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization
continues to place its Customers' purchase (and redemption) requests with the
Funds, CGFSC will send confirmations of such transactions and periodic account
statements directly to the shareholders of record. Shares in the Funds bear the
expense of fees payable to Shareholder Organizations for such services. See
"Shareholder Organizations."
Redemption Procedures
- ---------------------
Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the
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<PAGE>
Company, although Shareholder Organizations may charge a Customer's account for
wiring redemption proceeds. Information relating to such redemption services
and charges, if any, is available from the Shareholder Organizations. An
Investor redeeming shares through a registered investment adviser or certified
financial planner may incur transaction charges in connection with such
redemptions. Such Investors should contact their registered investment adviser
or certified financial planner for further information on transaction fees.
Investors may redeem all or part of their shares in accordance with any of the
procedures described below (these procedures also apply to Customers of
Shareholder Organizations for whom individual accounts have been established
with CGFSC).
As discussed in the Prospectus, a redemption request for an amount
in excess of $50,000 per account, or for any amount if the proceeds are to be
sent elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for shares redeemed will
ordinarily be made by mail within five Business Days after receipt by CGFSC of
the redemption request in good order. Questions with respect to the proper form
for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).
Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
- ----------------------------
The Company may suspend the right of redemption or postpone the date
of
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<PAGE>
payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
The Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. The Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.
Under certain circumstances, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of the Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions
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<PAGE>
are automatically reinvested in additional shares of a Fund. Amounts paid to
investors under this Plan should not be considered as income. Withdrawal
payments represent proceeds from the sale of shares, and there will be a
reduction of the shareholder's equity in the Fund involved if the amount of the
withdrawal payments exceeds the dividends and distributions paid on the shares
and the appreciation of the Investor's investment in the Fund. This in turn
may result in a complete depletion of the shareholder's investment. An
Investor may not participate in a program of systematic investing in a Fund
while at the same time participating in the Systematic Withdrawal Plan with
respect to an account in the same Fund. Customers of Shareholder Organizations
may obtain information on the availability of, and the procedures and fees
relating to, the Systematic Withdrawal Plan directly from their Shareholder
Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Company or Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund" and,
collectively with the Company, the "Companies") or for Shares of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.
Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
- ----------------
Shares are available for purchase by Investors in connection with the
following
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<PAGE>
tax-deferred prototype retirement plans offered by United States Trust Company
of New York ("U.S. Trust New York"):
. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
. Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit themselves and
their employees; and
. Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase
shares of the Funds pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.
Automatic Investment Program
- ----------------------------
The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, dollar cost averaging should
usually be followed on a sustained, consistent basis. Investors should be
aware, however, that shares bought using dollar cost averaging are purchased
without regard to their price on the day of investment or to market trends. In
addition, while Investors may find dollar cost averaging to be beneficial, it
will not prevent a loss if an Investor ultimately redeems his shares at a price
which is lower than their purchase price. The Company may modify or terminate
this privilege at any time or charge a service fee, although no such fee
currently is contemplated. An Investor may also implement the dollar cost
averaging method on his own initiative or through other entities.
Additional Information
- ----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
-24-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
----------------------------
The Company's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of common stock, $.001 par value
per share, and to classify or reclassify any unissued shares of the Company into
one or more classes or series by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into 46 series of shares representing interests in 18 investment
portfolios.
Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the Company's Board of Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.
Shareholders of the Company are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of the Company voting
without regard to class.
The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include
-25-
<PAGE>
securities issued by the purchaser and, in connection therewith, to cause all
outstanding shares of the Fund involved to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(b) sell and convert a Fund's assets into money and, in connection therewith,
to cause all outstanding shares of the Fund involved to be redeemed at their
net asset value; or (c) combine the assets belonging to a Fund with the assets
belonging to another portfolio of the Company, if the Board of Directors
reasonably determines that such combination will not have a material adverse
effect on shareholders of any portfolio participating in such combination, and,
in connection therewith, to cause all outstanding shares of the Fund involved
to be redeemed at their net asset value or converted into shares of another
class of the Company's common stock at net asset value. The exercise of such
authority by the Board of Directors will be subject to the provisions of the
1940 Act, and the Board of Directors will not take any action described in this
paragraph unless the proposed action has been disclosed in writing to the
particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.
Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.
-26-
<PAGE>
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The business and affairs of the Funds are managed under the direction
of the Company's Board of Directors. The directors and executive officers of
the Company, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------------------------------- -------------------------------- ------------------------------------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Retired; Chairman of the Boards (since 1997),
238 June Road Board, President and President, Treasurer and Director of the
Stamford, CT 06903 and Treasurer Company and Excelsior Tax-Exempt Funds, Inc.
Age: 68 (since 1995); Chairman of the Board (since
1997), and President, Treasurer and Trustee of
Excelsior Institutional Trust (since 1995);
Chairman of the Board (from 1997 to 1999), and
President, Treasurer and Trustee of Excelsior
Funds (from 1995 to 1999); Vice Chairman of
U.S. Trust Corporation and U.S. Trust New York
(from February 1990 until September 1995); and
Chairman, U.S. Trust Company (from March 1993
to May 1997).
Donald L. Campbell Director Retired; Director of the Company and Excelsior
333 East 69th Street Tax-Exempt Fund (since 1984); Director of UST
Apt. 10-H Master Variable Series, Inc. (from 1994 to June
New York, NY 10021 1997); and Trustee of Excelsior Institutional Trust
Age: 73 (since 1995).
</TABLE>
- --------------------
1. This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-27-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------------------------------- -------------------------------- ------------------------------------------------
<S> <C> <C>
Rodman L. Drake Director Director of the Company and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Funds, Inc. (since 1996); Trustee
1251 Avenue of the Americas of Excelsior Institutional Trust (since 1994);
9th Floor Trustee, Excelsior Funds (from 1994 to 1999);
New York, NY 10020 Director, Parsons Brinkerhoff, Inc.
Age: 56 (engineering firm) (since 1995); President,
Continuation Investments Group, Inc. (since
1997); President, Mandrake Group (investment
and consulting firm) (1994-1997); Chairman,
MetroCashcard International, Inc.
(1999-present); Director, Hotelivision, Inc.
(1999-present); Director, Alliance Group
Services, Inc. (1998-present); Director,
Hyperion Total Return Fund, Inc. and three
other funds for which Hyperion Capital
Management, Inc. serves as investment adviser
(since 1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993 to 1996);
Director, The Latin America Smaller Companies
Fund, Inc. (1993-1998); Member of Advisory
Board, Argentina Private Equity Fund L.P. (from
1992 to 1996) and Garantia L.P. (Brazil) (from
1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of the Company and Excelsior
913 Franklin Lake Road Tax-Exempt Funds, Inc. (since 1984); Director
Franklin Lakes, NJ 07417 of UST Master Variable Series, Inc. (from 1994
Age: 74 to June 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of the Company and Excelsior
2320 Cumberland Road Tax-Exempt Funds, Inc. (since 1986); Director
Charlottesville, VA 22901-7726 of UST Master Variable Series, Inc. (from 1994
Age: 79 to June 1997); Trustee of Excelsior
Institutional Trust (since 1995); Director,
Deutsche Bank Financial, Inc. (since 1989);
Director, The Harbus Corporation (since 1951);
and Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1988).
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------------------------------- -------------------------------- ------------------------------------------------
<S> <C> <C>
Jonathan Piel Director Director of the Company and Excelsior
558 E. 87th Street Tax-Exempt Funds, Inc. (since 1996); Trustee
New York, NY 10128 of Excelsior Institutional Trust (since 1994);
Age: 60 Trustee of Excelsior Funds (from 1994 to 1999);
Vice President and Editor, Scientific American,
Inc. (from 1986 to 1994); Director, Group for
The South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts Institute
of Technology (since 1984).
Robert A. Robinson Director Director of the Company and Excelsior
Church Pension Group Tax-Exempt Funds, Inc. (since 1987); Director
800 Second Avenue of UST Master Variable Series, Inc. (from
New York, NY 10017 1994 to June 1997); Trustee of Excelsior
Age: 73 Institutional Trust (since 1995); President
Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee,
H.B. and F.H. Bugher Foundation and Director of
its wholly owned subsidiaries - Rosiclear
Lead and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director, Morehouse
Publishing Co. (1974-1998); Trustee, HSBC Funds
Trust and HSBC Mutual Funds Trust (since 1982);
and Director, Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/2/ Director Retired; Director of the Company and Excelsior
6549 Pine Meadows Drive Tax-Exempt Funds, Inc. (since 1985); Chairman
Spring Hill, FL 34606 of the Board of the Company and Excelsior
Age: 74 Tax-Exempt Funds, Inc. (1991-1997) and
Excelsior Institutional Trust (1996-1997);
President and Treasurer of the Company and
Excelsior Tax-Exempt Funds, Inc. (1994-1997)
and Excelsior Institutional Trust (1996-1997);
Chairman of the Board, President and Treasurer
of UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18th & Cherry Streets
Philadelphia, PA 19103-6996
Age: 56
</TABLE>
- --------------------
2. This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-29-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------------------------------- -------------------------------- ------------------------------------------------
<S> <C> <C>
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th & Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Secretary Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 38
Patricia M. Leyne Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (since August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 32 Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds Services
Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services Company
(from September 1995 to November 1996); Fund
Administrator, Chase Global Funds Services
Company (from February 1993 to September 1995).
</TABLE>
Each director of the Company receives an annual fee of $9,000 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to
receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners, receives
legal fees as counsel to the Company. The employees of CGFSC do not receive any
compensation from the Company for acting as officers of the Company. No person
who is currently an officer, director or employee of the Adviser serves as an
officer, director or employee of the Company. As of May 18, 2000, the
directors and officers of the Company as a group owned beneficially less than 1%
of the outstanding shares of each fund of the Company, and less than 1% of the
outstanding shares of all funds of the Company in the aggregate.
-30-
<PAGE>
The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or from the
Compensation Retirement Benefits Estimated Annual Company and
Name of from the Accrued as Part of Benefits Fund Complex*
Person/Position Company Fund Expenses Upon Retirement Paid to Directors
- ------------------------------- ---------------- ---------------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Donald L. Campbell $ ----- None None $-----(3)**
Director
Rodman L. Drake $ ----- None None $-----(4)**
Director
Joseph H. Dugan $ ----- None None $-----(3)**
Director
Wolfe J. Frankl $ ----- None None $-----(3)**
Director
Jonathan Piel $ ----- None None $-----(4)**
Director
Robert A. Robinson $ ----- None None $-----(3)**
Director
Alfred C. Tannachion $ ----- None $-----(3)**
Director
Frederick S. Wonham $ ----- None None $-----(4)**
Chairman of the Board,
President and Treasurer
</TABLE>
- --------------------
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust, and until December 15, 1999, Excelsior Funds.
** Number of investment companies in the Fund Complex for which director served
as director or trustee.
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
-31-
<PAGE>
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectus. The Adviser has also agreed to pay all expenses incurred by it
in connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, purchased for the Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Energy and Natural Resources Fund pursuant to an advisory
agreement substantially similar to the Investment Advisory Agreement currently
in effect for the Fund.
For the services provided and expenses assumed pursuant to the
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly, at the annual rate of 0.60% of the average
daily net assets of the Energy and Natural Resources Fund, and 1.00% of the
average daily net assets of the Real Estate Fund.
From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Company paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------ -------------------- ----------------------
<S> <C> <C> <C>
Energy and Natural
Resources Fund $ $219,983 $225,193
Real Estate Fund $ $295,825 $109,381
</TABLE>
-32-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Adviser
voluntarily agreed to waive a portion of its advisory fee for certain funds.
During the periods stated, these waivers reduced advisory fees by the following:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------ -------------------- ----------------------
<S> <C> <C> <C>
Energy and Natural
Resources Fund $ $41,522 $30,724
Real Estate Fund $ $86,406 $28,552
</TABLE>
The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreements to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.
As discussed in the prospectus, U.S. Trust Corporation, parent of
U.S. Trust, and The Charles Schwab Corporation entered into a definitive
agreement to merge on January 12, 2000. After the merger, U.S. Trust
Corporation will be a wholly-owned subsidiary of Schwab. The merger is
anticipated to close by July 2000; however, it is subject to a number of
conditions, including certain regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Funds
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreements (the
"Existing Agreements"). Accordingly, the shareholders of the Fund have been
asked to approve a new investment advisory agreement ("New Agreement") between
the Funds and U.S. Trust. The New Agreement will become effective upon the date
of the merger. If the merger is not consummated, the Fund will operate under
the New Agreement, which will become effective upon the date of termination of
the merger agreement.
The New Agreement contains substantially the same terms and conditions
as the Existing Agreements, and the advisory fee will remain the same under the
New Agreement.
CGFSC, Federated Administrative Services (an affiliate of the
Distributor) and U.S. Trust Company (together, the "Administrators") serve as
the Company's administrators
-33-
<PAGE>
and provide the Funds with general administrative and operational assistance.
Under the Administration Agreement, the Administrators have agreed to maintain
office facilities for the Funds, furnish the Funds with statistical and research
data, clerical, accounting and bookkeeping services, and certain other services
required by the Funds, and to compute the net asset value, net income and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Company's administrators pursuant to an
administration agreement substantially similar to the Administration Agreement
currently in effect for the Company.
The Administrators also provide administrative services to the other
investment portfolios of the Company and to all of the investment portfolios of
Excelsior Tax-Exempt Fund and Excelsior Institutional Trust which are also
advised by U.S. Trust and its affiliates and distributed by the Distributor.
For services provided to all of the investment portfolios of the Company,
Excelsior Tax-Exempt Fund and Excelsior Institutional Trust (except for the
international portfolios of the Company and Excelsior Institutional Trust), the
Administrators are entitled jointly to fees, computed daily and paid monthly,
based on the combined aggregate average daily net assets of the three companies
(excluding the international portfolios of the Company and Excelsior
Institutional Trust) as follows:
Combined Aggregate Average Daily Net Assets
of the Company, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust (excluding
the international portfolios of the Company
and Excelsior Institutional Trust)
----------------------------------
Annual Fee
----------
First $200 million 0.200%
Next $200 million 0.175%
Over $400 million 0.150%
Administration fees payable to the Administrators by each portfolio of
the Company, Excelsior Tax-Exempt Fund and Excelsior Institutional Trust are
allocated in proportion to their relative average daily net assets at the time
of determination. From time to time, the Administrators may voluntarily waive
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time.
-34-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------ ------------------- --------------------
<S> <C> <C> <C>
International Fund $ $59,511 $63,037
Latin America Fund $ $58,438 $20,453
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------ ------------------- --------------------
<S> <C> <C> <C>
International Fund $ $7,177 $2,222
Latin America Fund $ $ 43 $ 0
</TABLE>
Shareholder Organizations
- -------------------------
The Company has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40% of the average daily net assets of the Fund's shares beneficially owned by
Customers of the Shareholder Organization. Such services may include: (a)
acting as recordholder of shares; (b) assisting in processing purchase, exchange
and redemption transactions; (c) transmitting and receiving funds in connection
with Customer orders to purchase, exchange or redeem shares; (d) providing
periodic statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Company to Customers; and
(g) providing or arranging for the provision of other related services. It is
the responsibility of Shareholder Organizations to advise Customers of any fees
that they may charge in connection with a Customer's investment. Until further
notice, the Adviser and Administrators have voluntarily agreed to waive fees
payable by a Fund in an aggregate amount equal to administrative service fees
payable by that Fund.
-35-
<PAGE>
The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company.
Pursuant to the Plan, the Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of the Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to the Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Company's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Company's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 2000, the Company made payments
to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
------------------ ---------------------------
<S> <C> <C>
Energy and Natural Resources Fund $ $
Real Estate Fund $ $
</TABLE>
For the fiscal year ended March 31, 1999, the Company made payments
to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
------------------ ---------------------------
<S> <C> <C>
Energy and Natural Resources Fund $48,699 $15,896
Real Estate Fund $37,486 $37,231
</TABLE>
-36-
<PAGE>
For the fiscal year ended March 31, 1998, the Company made payments
to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
----------------- ----------------------------
<S> <C> <C>
Energy and Natural Resources Funds $29,091 $21,008
Real Estate Fund $ 1,794 $ 1,794
</TABLE>
Expenses
- --------
Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include:
taxes; interest; fees (including fees paid to the Company's directors and
officers who are not affiliated with the Distributor or the Administrators); SEC
fees; state securities qualifications fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent, and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; costs of independent pricing
services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions
in connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under
the Custodian Agreement, Chase has agreed to: (i) maintain a separate account
or accounts in the name of the Funds; (ii) make receipts and disbursements of
money on behalf of the Funds; (iii) collect and receive all income and other
payments and distributions on account of the Funds' portfolio securities; (iv)
respond to correspondence from securities brokers and others relating to its
duties; (v) maintain certain financial accounts and records; and (vi) make
periodic reports to the Company's Board of Directors concerning the Funds'
operations. Chase may, at its own expense, open and maintain custody accounts
with respect to the Funds with other banks or trust companies, provided that
Chase shall remain liable for the performance of all its custodial duties under
the Custodian Agreement, notwithstanding any delegation. Communications to the
custodian should be directed to Chase, Mutual Funds Service Division, 3 Chase
MetroTech Center, 8th Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties;
-37-
<PAGE>
(iv) maintain shareholder accounts; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. For its transfer
agency, dividend-disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services. U.S. Trust New York is located at 114 W. 47th Street, New York, New
York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Company's Board of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of all portfolio securities of the Funds.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rates may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Funds' portfolio
turnover rates.
-38-
<PAGE>
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. In executing portfolio
transactions for the Funds, the Adviser may use affiliated brokers in accordance
with the requirements of the 1940 Act. The Adviser may also take into account
the sale of Fund shares in allocating brokerage transactions.
For the fiscal years ended March 31, 2000, 1999 and 1998, the Funds
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
% of Total
Total Amount of
Brokerage Transaction on
Total Commissions % of Total which
Brokerage Paid to Commission Commissions
Commissions Affiliated Paid to UST were Paid to UST
Paid Persons Securities Corp./1/ Securities Corp./1/
----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 2000:
- --------------------------------
Energy and Natural Resources Fund $ $
Real Estate Fund $ $
Fiscal year ended March 31, 1999:
- --------------------------------
Energy and Natural Resources Fund $199,479 None
Real Estate Fund $ 61,187 None
Fiscal year ended March 31, 1998:
- --------------------------------
Energy and Natural Resources Fund $122,934 $630 0.51% 0.62%
Real Estate Fund $103,563 None $
</TABLE>
/1/ UST Securities Corp. is an affiliate of an Adviser.
Transactions in domestic over-the-counter markets are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to over-the-
counter transactions, the Funds, where possible, will deal directly with the
dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.
-39-
<PAGE>
The Investment Advisory Agreements between the Company and the Adviser
provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems 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 and
whether such broker or dealer is selling shares of the Company, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Company's Board
of Directors from time to time with respect to the extent and continuation of
the policy, to cause the Funds to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion.
Such brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fees payable by the Funds. Such information may
be useful to the Adviser in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Funds.
During the fiscal year ended March 31, 2000, the Adviser directed
Fund brokerage transactions to brokers because of research services provided.
The amounts of such transactions and their related commissions are as follows:
<TABLE>
<CAPTION>
Fund Amount of Transactions Related Commission
- ---- ---------------------- ------------------
<S> <C> <C>
Energy and Natural Resources Fund $------- $------
Real Estate Fund $------- $------
</TABLE>
Portfolio securities will not be purchased from or sold to the
Adviser, Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund and another
investment company or common trust fund, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to the Fund and such other investment company
or common trust fund.
-40-
<PAGE>
In some instances, this investment procedure may adversely affect the price paid
or received by the Funds or the size of the position obtained by the Funds. To
the extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 2000, the Funds did not hold any securities of the Company's regular
brokers or dealers or their parents.
PORTFOLIO VALUATION
-------------------
Assets in the Funds which are traded on a recognized domestic stock
exchange are valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on the national
securities market. Securities traded only on over-the-counter markets are
valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the most recent
bid and asked prices. An option or futures contract is valued at the last sales
price quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, the mean between the last bid
and asked prices. Gold and silver bullion held by the Energy and Natural
Resources Fund will be valued at the last spot settlement price on the Commodity
Exchange, Inc., and platinum and palladium bullion will be valued at the last
spot settlement price or, if not available, the settlement price of the nearest
contract month on the New York Mercantile Exchange. Restricted securities and
securities, precious metals or other assets for which market quotations are not
readily available are valued at fair value, pursuant to guidelines adopted by
the Company's Board of Directors.
Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an event subsequent
to the time where value was so established is likely to have changed such value,
then the fair value of those securities will be determined by consideration of
other factors under the direction of the Board of Directors. A security which
is listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Investments in
debt securities having a maturity of 60 days or less are valued based upon the
amortized cost method. All other foreign securities are valued at the last
current bid quotation if market quotations are available, or at fair value as
determined in accordance with guidelines adopted by the Board of Directors. For
valuation purposes, quotations of foreign securities in foreign currency are
converted to U.S. dollars equivalent at the prevailing market rate on the day of
conversion. Some of the securities acquired by a Fund may be traded on foreign
exchanges or over-the-counter markets on days which are not Business Days. In
such cases, the net asset value of the shares may be significantly affected on
days when investors can neither purchase nor redeem the Fund's shares. The
Company's administrators have undertaken to price the securities in the Funds'
portfolio, and may use one or more independent pricing services in connection
with this service.
-41-
<PAGE>
INDEPENDENT AUDITORS
--------------------
_________________, independent auditors ______________________
serve as auditors of the Company. The Funds' Financial Highlights included in
the Prospectus and the financial statements for the period ended March 31, ____
incorporated by reference in this Statement of Additional Information have been
audited by _________________ for the periods included in their reports thereon
which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners), One
Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103, is
counsel to the Company.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following supplements the tax information contained in the
Prospectus.
For federal income tax purposes, each Fund is treated as a separate
corporate entity and has qualified and intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). Such qualification generally relieves a Fund of liability for
federal income taxes to the extent its earnings are distributed in accordance
with applicable requirements. If, for any reason, a Fund does not qualify for a
taxable year for the special federal tax treatment afforded regulated investment
companies, such Fund would be subject to federal tax on all of its taxable
income at regular corporate rates, without any deduction for distributions to
shareholders. In such event, dividend distributions would be taxable as
ordinary income to shareholders to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders. Moreover, if a Fund
were to fail to make sufficient distributions in a year, the Fund would be
subject to corporate income taxes and/or excise taxes in respect of the
shortfall or, if the shortfall is large enough, the Fund could be disqualified
as a regulated investment company.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year
payable to
-42-
<PAGE>
shareholders of record on a specified date in such months will be deemed to have
been received by shareholders and paid by a Fund on December 31 of such year if
such dividends are actually paid during January of the following year.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."
With respect to the Real Estate Fund, the dividends received deduction
is not available for dividends attributable to distributions made by a REIT to
the Fund. In addition, distributions paid by REITs often include a "return of
capital." The Code requires a REIT to distribute at least 95% of its taxable
income to investors. In many cases, however, because of "non-cash" expenses
such as property depreciation, an equity REIT's cash flow will exceed its
taxable income. The REIT may distribute this excess cash to offer a more
competitive yield. This portion of the distribution is deemed a return of
capital, and is generally not taxable to shareholders. However, if shareholders
receive a return of capital, the basis of their shares is decreased by the
amount of such return of capital. This, in turn, affects the capital gain or
loss realized when shares of the REIT are exchanged or sold. If the Real
Estate Fund makes distributions in excess of its earnings, a shareholder's basis
in the Fund will be reduced by the amount of such return of capital if such
shareholder elects to receive distributions in cash (as opposed to having them
reinvested in additional shares of the Fund). If a shareholder's basis is
reduced to zero, any further return of capital distribution is taxable as a
capital gain.
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state, local and foreign taxes.
PERFORMANCE INFORMATION
-----------------------
The Funds may advertise the "average annual total return" for their
shares. Such total return figure reflects the average percentage change in the
value of an investment in a Fund from the beginning date of the measuring period
to the end of the measuring period. Average total return figures will be given
for the most recent one-year period, and may be given for other periods as well
(such as from the commencement of a Fund's operations, or on a year-by-year
basis). The average annual total return is computed by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:
-43-
<PAGE>
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
Each Fund may also advertise the "aggregate total return" for its
shares for various periods, representing the cumulative change in the value of
an investment in the Fund for the specific period. The aggregate total return
is computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate
total return is as follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in a Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Based on the foregoing calculations, the average annual total returns
for the Funds were as follows:
-44-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
---------------------------------------------------------------------------
For the Period from
For the Year Ended For the 5 Years Ended December 31, 1992
3/31/00 3/31/00 until 3/31/00
---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Energy and Natural
Resources Fund % % %/1/
Real Estate Fund* % N/A %/2/
</TABLE>
/1/ Commenced operation on December 31, 1992.
/2/ Commenced operation on October 1, 1997.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formulas set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value.
The total return of the Funds may be compared to that of other mutual funds
with similar investment objectives and to other relevant indices or to ratings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, the total return of
a Fund may be compared to data prepared by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. and Weisenberger Investment Company Service. The
total return of the Real Estate Fund may be compared to the S&P REIT Index, an
unmanaged index of over 100 publicly-traded equity, mortgage and hybrid REITs
which have high levels of liquidity and market capitalizations of at least $100
million, or the Morgan Stanley REIT Index, an unmanaged index of all publicly-
traded equity REITs (except health care REITs) which have total market
capitalizations of at least $100 million and are considered liquid. Total
return and yield data as reported in national financial publications such as
Money Magazine, Forbes, Barron's, The Wall Street Journal and The New York
- ----- -------- ------ -------- --- ---- ------ ------- --- --- ----
Times, or in publications of a local or regional nature, may also be used in
- -----
comparing the performance of a Fund. Advertisements, sales literature or
reports to shareholders may from time to time also include a discussion and
analysis of each Fund's performance, including, without limitation, those
factors, strategies and techniques that, together with market conditions and
events, materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares,
-45-
<PAGE>
any future income or capital appreciation of a Fund would increase the value,
not only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Funds may also include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
techniques, policies or investment suitability of a Fund, economic conditions,
the effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements, sales literature or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of the
Adviser as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, Treasury bills and shares of a
Fund. In addition, advertisements, sales literature or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
The Real Estate Fund may advertise the standardized effective 30-day
(or one month) yield calculated in accordance with the method prescribed by the
SEC for mutual funds. Such yield will be calculated for the Fund according to
the following formula:
a-b
Yield = 2 [(-------- + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = average daily number of shares outstanding that
were entitled to receive dividends.
d = maximum offering price per share on the last day of
the period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), the Real Estate Fund will compute the yield to
maturity of any debt obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest). Such yield
is then divided by 360, and the quotient is multiplied by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the
-46-
<PAGE>
subsequent month that the obligation is in the portfolio. It is assumed in the
above calculation that each month contains 30 days. Also, the maturity of a
debt obligation with a call provision is deemed to be the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. The Fund will calculate interest gained on tax-exempt
obligations issued without original issue discount and having a current market
discount by using the coupon rate of interest instead of the yield to maturity.
In the case of tax-exempt obligations with original issue discount, where the
discount based on the current market value exceeds the then-remaining portion of
original issue discount, the yield to maturity is the imputed rate based on the
original issue discount calculation. Conversely, where the discount based on
the current market value is less than the remaining portion of the original
issue discount, the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Real Estate Fund to all shareholder accounts
and to the particular series of shares in proportion to the length of the base
period and the Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the maximum offering price per share (variable "d" in
the formula). Based on the foregoing calculations, the Real Estate Fund's
standardized effective yield for the 30-day period ended March 31, 2000 was
____%.
Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of a Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an invest in the Funds with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that performance and
yield are generally functions of the kind and quality of the instruments held in
a portfolio, portfolio maturity, operating expenses, and market conditions. Any
fees charged by Shareholder Organizations with respect to accounts of Customers
that have invested in shares will not be included in calculations of performance
and yield.
CODE OF ETHICS
--------------
The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics for personnel subject to the codes to invest in
securities including securities that may be purchased or held by the Fund.
MISCELLANEOUS
-------------
As used herein, "assets allocable to the Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company not belonging to a particular portfolio of the Company. In
determining a Fund's net asset value, assets allocable to the Fund are charged
with the direct liabilities in respect of the Fund and with a share of the
general liabilities of the Company which are normally allocated in proportion to
the relative asset values of the Company's portfolios at
-47-
<PAGE>
the time of allocation. Subject to the provisions of the Company's Charter,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to a
particular Fund, are conclusive.
As of May 18, 2000, U.S. Trust and its affiliates held of record
substantially all of the Company's outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
As of May 18, 2000, the name, address and percentage ownership of
each person that owned benefically or of record 5% or more of the outstanding
shares of a Fund were as follows: ENERGY AND NATURAL RESOURCES FUND: Charles
Schwab & Co, Inc., Special Custody A/C for, Attn: Mutual Funds, 101 Montgomery
Street, San Franciso, California 94104, 21.00%; REAL ESTATE FUND: U.S. Trust
Retirement Fund, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York, 10036, 12.30%; and Eugene Higgins Residuary, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 7.36%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, ____ (the
"____ Annual Report") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the ____ Annual Report
are incorporated by reference herein. The financial statements included in the
_______ Annual Report for the Funds have been audited by the Company's
independent auditors, ______________ whose reports thereon also appear in the
______ Annual Report and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the _______ Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
-48-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion
of the creditworthiness of an obligor with respect to financial obligations
having an original maturity of no more than 365 days. The following summarizes
the rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D" rating will
also be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished from local currency issuer ratings to identify
A-1
<PAGE>
those instances where sovereign risks make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
A-2
<PAGE>
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates uncertain capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates a capacity for meeting financial commitments which is highly uncertain
and solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood
of an untimely payment of principal and interest of debt instruments with
original maturities of one year or less. The following summarizes the ratings
used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as non-
investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
A-4
<PAGE>
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due,
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"c" - The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The `r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples
of such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient
A-5
<PAGE>
information on which to base a rating, or that Standard & Poor's does not rate a
particular obligation as a matter of policy. Debt obligations of issuers
outside the United States and its territories are rated on the same basis as
domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds 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 risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (. . .) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "Aa" through "Ca." The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and
A-6
<PAGE>
the modifier 3 indicates a ranking in the lower end of its generic ranking
category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
A-7
<PAGE>
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major
rating categories.
`NR' indicates the Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change.
A-8
<PAGE>
There are designated as "Positive", indicating a potential upgrade, "Negative",
for a potential downgrade, or "Evolving", if ratings may be raised, lowered or
maintained. RatingAlert is typically resolved over a relatively short period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," - A rating of BB suggests that the likelihood of default is
considered less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could negatively affect the payment of interest and principal on a
timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-9
<PAGE>
Municipal Note Ratings
- ----------------------
A Standard and Poor's note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
EXCELSIOR FUNDS, INC.
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information (the "SAI") is not a prospectus
but should be read in conjunction with the current prospectuses for the Short-
Term Government Securities, Intermediate-Term Managed Income and Managed Income
Funds of Excelsior Funds, Inc. and the Short-Term Tax-Exempt Securities,
Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt Funds of Excelsior Tax-
Exempt Funds, Inc. (individually, a "Fund" and collectively, the "Funds") dated
August 1, 2000 (the "Prospectuses"). Copies of the Prospectuses may be obtained
by writing Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc. c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by
calling (800) 446-1012. Capitalized terms not otherwise defined have the same
meaning as in the Prospectus.
The audited financial statements and related reports of _________________,
independent auditors, contained in the annual reports to the Funds' shareholders
for the fiscal year ended March 31, _______ are incorporated herein by reference
in the section entitled "Financial Statements." No other parts of the annual
reports are incorporated herein by reference. Copies of the annual reports may
be obtained upon request and without charge by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY.............................. 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS............. 1
Additional Investment Policies..................... 1
Additional Information On Portfolio Instruments.... 4
Investment Limitations............................. 16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.......... 21
Distributor........................................ 21
Purchase Of Shares................................. 21
Redemption Procedures.............................. 22
Other Redemption Information....................... 23
INVESTOR PROGRAMS....................................... 24
Systematic Withdrawal Plan......................... 24
Exchange Privilege................................. 25
Retirement Plans................................... 25
Automatic Investment Program....................... 26
Additional Information............................. 26
DESCRIPTION OF CAPITAL STOCK............................ 26
MANAGEMENT OF THE FUNDS................................. 28
Directors And Officers............................. 28
Investment Advisory And Administration Agreements.. 33
Shareholder Organizations.......................... 39
Expenses........................................... 41
Custodian And Transfer Agent....................... 41
PORTFOLIO TRANSACTIONS.................................. 42
PORTFOLIO VALUATION..................................... 44
INDEPENDENT AUDITORS.................................... 45
COUNSEL................................................. 45
ADDITIONAL INFORMATION CONCERNING TAXES................. 45
Generally.......................................... 45
PERFORMANCE AND YIELD INFORMATION....................... 47
Yields And Performance............................. 47
CODE OF ETHICS.......................................... 51
MISCELLANEOUS........................................... 51
FINANCIAL STATEMENTS.................................... 52
APPENDIX A.............................................. A-1
</TABLE>
<PAGE>
CLASSIFICATION AND HISTORY
--------------------------
Excelsior Funds, Inc. ("Excelsior Fund") and Excelsior Tax-Exempt
Funds, Inc. ("Excelsior Tax-Exempt Fund" and collectively with Excelsior Fund,
the "Companies") are open-end, management investment companies. The Short-Term
Government Securities, Intermediate-Term Managed Income and Managed Income Funds
(collectively, the "Fixed-Income Funds") are separate series of Excelsior Fund.
The Short-Term Tax-Exempt Securities, Intermediate-Term Tax-Exempt and Long-Term
Tax-Exempt Funds (collectively, the "Tax-Exempt Funds") are separate series of
Excelsior Tax-Exempt Fund. Each Fund is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund offers
one class of shares, except that the Intermediate-Term Managed Income Fund also
offers Advisory Shares which are described in a separate SAI. Excelsior Fund and
Excelsior Tax-Exempt Fund were organized as Maryland corporations on August 2,
1984 and August 8, 1984, respectively. Prior to December 28, 1995, Excelsior
Fund and Excelsior Tax-Exempt Fund were known as "UST Master Funds, Inc." and
"UST Master Tax-Exempt Funds, Inc.," respectively.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------
The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectuses. The investment objective of each of the Funds may not be changed
without the vote of the holders of a majority of its outstanding shares (as
defined below). Except as expressly noted below, each Fund's investment policies
may be changed without shareholder approval.
For ease of reference, the various Funds are referred to as follows:
Short-Term Tax-Exempt Securities Fund as "ST Tax-Exempt Fund;" Intermediate-Term
Tax-Exempt Fund as "IT Tax-Exempt Fund;" Long-Term Tax-Exempt Fund as "LT Tax-
Exempt Fund;" Short-Term Government Securities Fund as "ST Government Fund;" and
Intermediate-Term Managed Income Fund as "IT Managed Income Fund."
Additional Investment Policies
- ------------------------------
Short-Term Government Securities Fund
- -------------------------------------
Under normal circumstances, at least 65% of the ST Government Fund's
total assets will be invested in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements
collateralized by such obligations. As a result, the interest income on such
investments generally should be exempt from state and local personal income
taxes in most states. In all states this tax exemption is passed through to the
Fund's shareholders.
-1-
<PAGE>
Intermediate-Term Managed Income and Managed Income Funds
- ---------------------------------------------------------
The IT Managed Income and Managed Income Funds may invest in the
following types of securities: corporate debt obligations such as bonds,
debentures, obligations convertible into common stocks and money market
instruments; preferred stocks; and obligations issued or guaranteed by the U.S.
government and its agencies or instrumentalities. The Funds are also permitted
to enter into repurchase agreements. The Funds may, from time to time, invest in
debt obligations issued by or on behalf of states, territories and possessions
of the United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political subdivisions, the interest from which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Obligations"). The purchase of Municipal Obligations may be
advantageous when, as a result of prevailing economic, regulatory or other
circumstances, the performance of such securities, on a pre-tax basis, is
comparable to that of corporate or U.S. government debt obligations.
Under normal market conditions, at least 75% of the IT Managed Income
and Managed Income Funds' total assets will be invested in investment-grade debt
obligations rated within the three highest ratings of Standard & Poor's Ratings
Services ("S&P") or Moody's Investors Service, Inc. ("Moody's") (or in unrated
obligations considered to be of comparable credit quality by the Adviser) and in
U.S. government obligations and money market instruments of the types listed
below under "Additional Information on Portfolio Instruments - Money Market
Instruments." When, in the opinion of the Adviser, a defensive investment
posture is warranted, the Funds may invest temporarily and without limitation in
high quality, short-term money market instruments.
Unrated securities will be considered of investment grade if deemed by
the Adviser to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers of such securities are rated "Baa/BBB" or
better. It should be noted that obligations rated in the lowest of the top four
ratings ("Baa" by Moody's or "BBB" by S&P) are considered to have some
speculative characteristics and are more sensitive to economic change than
higher rated bonds.
The IT Managed Income and Managed Income Funds may invest up to 25% of
their respective total assets in: preferred stocks; dollar-denominated debt
obligations of foreign issuers, including foreign corporations and foreign
governments; and dollar-denominated debt obligations of U.S. companies issued
outside the United States. The Funds may also enter into foreign currency
exchange transactions for hedging purposes. The Funds may invest up to 10% and
25% of their respective total assets in obligations rated below the four highest
ratings of S&P or Moody's ("junk bonds") with no minimum rating required. The
Funds will not invest in common stocks, and any common stocks received through
conversion of convertible debt obligations will be sold in an orderly manner as
soon as possible.
-2-
<PAGE>
Short-Term Tax-Exempt Securities, Intermediate-Term Tax-Exempt and Long-Term
- ----------------------------------------------------------------------------
Tax-Exempt Funds
- ----------------
The Tax-Exempt Funds will invest substantially all of their assets in
Municipal Obligations which are determined by the Adviser to present minimal
credit risks. As a matter of fundamental policy, except during temporary
defensive periods, each Fund will maintain at least 80% of its net assets in
Municipal Obligations. (This policy may not be changed with respect to a Fund
without the vote of the holders of a majority of its outstanding shares.)
However, from time to time on a temporary defensive basis due to market
conditions, each Fund may hold uninvested cash reserves or invest in taxable
obligations in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions may warrant. Uninvested cash reserves will not
earn income. Should a Fund invest in taxable obligations, it would purchase:
(i) obligations of the U.S. Treasury; (ii) obligations of agencies and
instrumentalities of the U.S. government; (iii) money market instruments such as
certificates of deposit, commercial paper, and bankers' acceptances; (iv)
repurchase agreements collateralized by U.S. government obligations or other
money market instruments; (v) municipal bond index and interest rate futures
contracts; or (vi) securities issued by other investment companies that invest
in high quality, short-term securities.
In seeking to achieve its investment objective, each Tax-Exempt Fund
may invest in "private activity bonds" (see "Additional Information on Portfolio
Instruments -- Municipal Obligations" below), the interest on which is treated
as a specific tax preference item under the federal alternative minimum tax.
Investments in such securities, however, will not exceed under normal market
conditions 20% of a Fund's total assets when added together with any taxable
investments held by that Fund.
The Municipal Obligations purchased by the Funds will consist of: (1)
bonds rated "BBB" or higher by S&P or by Fitch IBCA ("Fitch"), or "Baa" or
higher by Moody's, or, in certain instances, bonds with lower ratings if they
are determined by the Adviser to be comparable to BBB/Baa-rated issues; (2)
notes rated "MIG-3" or higher ("VMIG-3" or higher in the case of variable rate
notes) by Moody's, or "SP-3" or higher by S&P, or "F3" or higher by Fitch; and
(3) commercial paper rated "Prime-3" or higher by Moody's, or "A-3" or higher by
S&P, or "F3" or higher by Fitch. Securities rated "BBB" by S&P and Fitch or
"Baa" by Moody's are generally considered to be investment grade, although they
have speculative characteristics and are more sensitive to economic change than
higher rated securities. If not rated, securities purchased by the Funds will be
of comparable quality to the above ratings as determined by the Adviser under
the supervision of the Board of Directors. A discussion of Moody's, Fitch's and
S&P's rating categories is contained in Appendix A.
Although the Funds do not presently intend to do so on a regular
basis, they may invest more than 25% of their assets in Municipal Obligations
the interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
a Fund's assets are concentrated in Municipal Obligations payable from revenues
on similar projects, the Fund will be subject to the peculiar risks presented by
such projects to a greater extent than it would be if the Fund's assets were not
so concentrated.
-3-
<PAGE>
Additional Information on Portfolio Instruments
- -----------------------------------------------
Municipal Obligations
---------------------
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Obligations" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.
The two principal classifications of Municipal Obligations which may
be held by the Tax-Exempt Funds are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as user
fees of the facility being financed.
The Tax-Exempt Funds' portfolios may also include "moral obligation"
securities, which are usually issued by public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund--the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality which
created the issuer. There is no limitation on the amount of moral obligation
securities that may be held by the Funds.
The Tax-Exempt Funds may also purchase custodial receipts evidencing
the right to receive either the principal amount or the periodic interest
payments or both with respect to specific underlying Municipal Obligations. In
general, such "stripped" Municipal Obligations are offered at a substantial
discount in relation to the principal and/or interest payments which the holders
of the receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield on
the underlying Municipal Obligation, such yield will be exempt from federal
income tax for such investor to the same extent as interest on the underlying
Municipal Obligation. The Funds intend to purchase "stripped" Municipal
Obligations only when the yield thereon will be, as described above, exempt from
federal income tax to the same extent as interest on the underlying Municipal
Obligations. "Stripped" Municipal Obligations are considered illiquid securities
subject to the limit described below under "Illiquid Securities." The Tax-Exempt
Funds will limit their investments in interest-only and principal-only Municipal
Obligations to 5% of their total assets.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal
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Obligations depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. The ratings of nationally recognized
statistical rating organizations ("NRSROs") such as Moody's and S&P described in
Appendix A hereto represent their opinion as to the quality of Municipal
Obligations. It should be emphasized that these ratings are general and are not
absolute standards of quality, and Municipal Obligations with the same maturity,
interest rate, and rating may have different yields while Municipal Obligations
of the same maturity and interest rate with different ratings may have the same
yield. Subsequent to its purchase by a Fund, an issue of Municipal Obligations
may cease to be rated, or its rating may be reduced below the minimum rating
required for purchase by that Fund. The Adviser will consider such an event in
determining whether a Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multistate
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer." An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the Funds are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.
Among other instruments, the Tax-Exempt Funds may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax
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funds, the proceeds of bond placements or other revenues. In addition, each Fund
may invest in long-term tax-exempt instruments, such as municipal bonds and
private activity bonds, to the extent consistent with the maturity restrictions
applicable to it.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Tax-
Exempt Funds nor the Adviser will review the proceedings relating to the
issuance of Municipal Obligations or the bases for such opinions.
The IT Managed Income and Managed Income Funds may, when deemed
appropriate by the Adviser in light of the Funds' investment objectives, also
invest in Municipal Obligations. Although yields on Municipal Obligations can
generally be expected under normal market conditions to be lower than yields on
corporate and U.S. government obligations, from time to time municipal
securities have outperformed, on a total return basis, comparable corporate and
federal debt obligations as a result of prevailing economic, regulatory or other
circumstances. Dividends paid by the IT Managed Income and Managed Income Funds
that are derived from interest on municipal securities would be taxable to the
Funds' shareholders for federal income tax purposes.
Insured Municipal Obligations
-----------------------------
The Tax-Exempt Funds may purchase Municipal Obligations which are
insured as to timely payment of principal and interest at the time of purchase.
The insurance policies will usually be obtained by the issuer of the bond at the
time of its original issuance. Bonds of this type will be acquired only if at
the time of purchase they satisfy quality requirements generally applicable to
Municipal Obligations. Although insurance coverage for the Municipal Obligations
held by the Tax-Exempt Funds reduces credit risk by insuring that the Funds will
receive timely payment of principal and interest, it does not protect against
market fluctuations caused by changes in interest rates and other factors. Each
Tax-Exempt Fund may invest more than 25% of its net assets in Municipal
Obligations covered by insurance policies.
Repurchase Agreements
---------------------
Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). Each Fund will enter into repurchase agreements only
with financial institutions such as banks or broker/dealers which are deemed to
be creditworthy by the Adviser. The Funds will not enter into repurchase
agreements with the Adviser or its affiliates. Repurchase agreements with
remaining maturities in excess of seven days will be considered illiquid
securities subject to the 10% limit described below under "Illiquid Securities."
The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose a
Fund to possible delay in connection with the disposition of the underlying
securities or loss to the extent that proceeds from a sale of the
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underlying securities were less than the repurchase price under the agreement.
Income on the repurchase agreements will be taxable.
The repurchase price under a repurchase agreement generally equals the
price paid by a Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to repurchase agreements are held by
the Funds' custodian (or sub-custodian) or in the Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered loans by a Fund under the
1940 Act.
Investment Company Securities
-----------------------------
The Funds may also invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by the Funds within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition against a Fund
investing more than 10% of the value of its total assets in such securities.
[Each Fund may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be contained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception
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that the pricing mechanism for SPDRs is based on a basket of stocks. Disruptions
in the markets for the securities underlying SPDRs purchased or sold by the
Funds could result in losses on SPDRs.]
Securities Lending
------------------
To increase return on their portfolio securities, the Fixed Income
Funds may lend their portfolio securities to broker/dealers pursuant to
agreements requiring the loans to be continuously secured by collateral equal at
all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. government,
its agencies or instrumentalities, or an irrevocable letter of credit issued by
a bank which meets the investment standards of a Fund, or any combination
thereof. Such loans will not be made if, as a result, the aggregate of all
outstanding loans of a Fund exceeds 30% of the value of its total assets. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. However, loans are made only to borrowers
deemed by the Adviser to be of good standing and when, in the Adviser's
judgment, the income to be earned from the loan justifies the attendant risks.
When the Fixed Income Funds lend their portfolio securities, they
continue to receive interest or dividends on the securities lent and may
simultaneously earn interest on the investment of the cash loan collateral,
which will be invested in readily marketable, high-quality, short-term
obligations. Although voting rights, or rights to consent, attendant to
securities lent pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by the pertinent Fund if a
material event affecting the investment is to occur.
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The Securities and Exchange Commission (the "SEC") views
reverse repurchase agreements as a form of borrowing. At the time a Fund enters
into a reverse repurchase agreement, it will place in a segregated custodial
account liquid assets having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements involve the risk that the market
value of the securities sold by a Fund may decline below the repurchase price of
those securities.
Illiquid Securities
-------------------
No Fund will knowingly invest more than 10% of the value of its net
assets in securities that are illiquid. A security will be considered illiquid
if it may not be disposed of within seven days at approximately the value at
which the particular Fund has valued the
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security. Each Fund may purchase securities which are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but which can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. Any such security will not be considered illiquid so long as it is
determined by the Adviser, acting under guidelines approved and monitored by the
Boards, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers are no longer
interested in purchasing these restricted securities.
Government Obligations
----------------------
The Funds may purchase government obligations which include
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the
U.S. government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. government would
provide financial support to U.S. government-sponsored instrumentalities if it
is not obligated to do so by law. Obligations of such instrumentalities will be
purchased only when the Adviser believes that the credit risk with respect to
the instrumentality is minimal.
Examples of the types of U.S. government obligations that may be held
by the Funds include, in addition to U.S. Treasury Bills, the obligations of
Federal Home Loan Banks, the Farm Credit System Financial Assistance
Corporation, Federal Land Banks, the Federal Financing Bank, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, the Tennessee Valley Authority and Maritime
Administration.
When-Issued and Forward Transactions
------------------------------------
Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains
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<PAGE>
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund will set aside cash or liquid assets to satisfy its purchase
commitments in the manner described, its liquidity and ability to manage its
portfolio might be affected in the event its forward commitments or commitments
to purchase "when-issued" securities ever exceeded 25% of the value of its
assets.
It is expected that forward commitments and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Managed Income and IT Managed Income Funds and the Tax-Exempt
Funds may acquire "stand-by commitments" with respect to Municipal Obligations
held by them. Under a "stand-by commitment," a dealer or bank agrees to purchase
from a Fund, at the Fund's option, specified Municipal Obligations at a
specified price. The amount payable to a Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the Municipal
Obligations (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. "Stand-by commitments" are exercisable by a Fund at any time
before the maturity of the underlying Municipal Obligations, and may be sold,
transferred or assigned by the Fund only with the underlying instruments.
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The Managed Income and IT Managed Income Funds and the Tax-Exempt
Funds expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for a "stand-by commitment" either separately in cash
or by paying a higher price for securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities). Where a Fund has paid any consideration directly or indirectly for
a "stand-by commitment," its cost will be reflected as unrealized depreciation
for the period during which the commitment was held by the Fund.
The Managed Income and IT Managed Income Funds and the Tax-Exempt
Funds intend to enter into "stand-by commitments" only with banks and
broker/dealers which, in the Adviser's opinion, present minimal credit risks. In
evaluating the creditworthiness of the issuer of a "stand-by commitment," the
Adviser will review periodically the issuer's assets, liabilities, contingent
claims and other relevant financial information. The Funds will acquire "stand-
by commitments" solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes. "Stand-by commitments"
acquired by a Fund will be valued at zero in determining the Fund's net asset
value.
Futures Contracts
-----------------
The Funds may invest in interest rate futures contracts and municipal
bond index futures contracts as a hedge against changes in market conditions. A
municipal bond index assigns values daily to the municipal bonds included in the
index based on the independent assessment of dealer-to-dealer municipal bond
brokers. A municipal bond index futures contract represents a firm commitment by
which two parties agree to take or make delivery of an amount equal to a
specified dollar amount multiplied by the difference between the municipal bond
index value on the last trading date of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities in the index is made. Any income from investments in futures
contracts will be taxable income of the Funds.
The Fund may enter into contracts for the future delivery of fixed-
income securities commonly known as interest rate futures contracts. Interest
rate futures contracts are similar to municipal bond index futures contracts
except that, instead of a municipal bond index, the "underlying commodity" is
represented by various types of fixed-income securities.
The Funds will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of securities
which they hold or intend to purchase where the transactions are intended to
reduce risks inherent in the management of the Funds. Each Fund may engage in
futures contracts only to the extent permitted by the Commodity Futures Trading
Commission ("CFTC") and the SEC. Each Fund currently intends to limit its
hedging transactions in futures contracts so that, immediately after any such
transaction, the aggregate initial margin that is required to be posted by the
Fund under the rules of the exchange on which the futures contract is traded
does not exceed 5% of the Fund's total assets, after taking into account any
unrealized profits and unrealized losses on the Fund's open contracts.
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<PAGE>
When investing in futures contracts, the Funds must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When a Fund takes a long position in a futures contract, it must maintain a
segregated account containing liquid assets equal to the purchase price of the
contract, less any margin or deposit. When a Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established. Asset segregation
requirements are not applicable when a Fund "covers" a futures position
generally by entering into an offsetting position. Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event of
adverse price movements, a Fund would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if a Fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. In addition, a Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on a Fund's
ability to effectively hedge.
Transactions by a Fund in futures contracts may subject the Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts and movements in the price of the instruments being hedged. In
addition, investments in futures may subject a Fund to losses due to
unanticipated market movements which are potentially unlimited. Further, there
is no assurance that a liquid market will exist for any particular futures
contract at any particular time. Consequently, a Fund may realize a loss on a
futures transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements. In addition, in some
situations, if a Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements.
As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss
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<PAGE>
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, before any deduction for the transaction
costs, if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Forward Currency Transactions
-----------------------------
The Managed Income and IT Managed Income Funds will conduct their
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange markets, or by entering into forward
currency contracts. A forward foreign currency contract involves an obligation
to purchase or sell a specific currency for a set price at a future date. In
this respect, forward currency contracts are similar to foreign currency futures
contracts; however, unlike futures contracts which are traded on recognized
commodities exchange, forward currency contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. Also, forward currency contracts usually involve
delivery of the currency involved instead of cash payment as in the case of
futures contracts.
A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose of
transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions
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<PAGE>
denominated or quoted in that currency. The Funds will not speculate in foreign
currency exchange transactions. Transaction and position hedging will not be
limited to an overall percentage of a Fund's assets, but will be employed as
necessary to correspond to particular transactions or positions. A Fund may not
hedge its currency positions to an extent greater than the aggregate market
value (at the time of entering into the forward contract) of the securities held
in its portfolio denominated, quoted in, or currently convertible into that
particular currency. When the Funds engage in forward currency transactions,
certain asset segregation requirements must be satisfied to ensure that the use
of foreign currency transactions is unleveraged. When a Fund takes a long
position in a forward currency contract, it must maintain a segregated account
containing liquid assets equal to the purchase price of the contract, less any
margin or deposit. When a Fund takes a short position in a forward currency
contract, the Fund must maintain a segregated account containing liquid assets
in an amount equal to the market value of the currency underlying such contract
(less any margin or deposit), which amount must be at least equal to the market
price at which the short position was established. Asset segregation
requirements are not applicable when a Fund "covers" a forward currency position
generally by entering into an offsetting position.
The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
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<PAGE>
Money Market Instruments
------------------------
"Money market instruments" that may be purchased by the Tax-Exempt
Funds and the IT Managed Income and Managed Income Funds in accordance with
their investment objectives and policies include, among other things, bank
obligations, commercial paper and corporate bonds with remaining maturities of
13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations acquired
by the IT Managed Income and Managed Income Funds may also include U.S. dollar-
denominated obligations of foreign branches of U.S. banks and obligations of
domestic branches of foreign banks. Investments in bank obligations of foreign
branches of domestic financial institutions or of domestic branches of foreign
banks are limited so that no more than 5% of the value of the Managed Income
Fund's total assets will be invested in obligations of any one foreign or
domestic branch and no more than 20% of the Fund's total assets at the time of
purchase will be invested in the aggregate in such obligations. Investments in
time deposits are limited to no more than 5% of the value of a Fund's total
assets at time of purchase.
Investments by the Fixed-Income Funds in commercial paper will consist
of issues that are rated "A-2" or better by S&P, "Prime-2" or better by Moody's,
or "F2" or better by Fitch. Investments by the Tax-Exempt Funds in commercial
paper will consist of issues that are rated "A-3" or better by S&P, "Prime-3" or
better by Moody's, or "F3" or better by Fitch. In addition, each Fund may
acquire unrated commercial paper that is determined by the Adviser at the time
of purchase to be of comparable quality to rated instruments that may be
acquired by the particular Fund.
Variable and Floating Rate Instruments
--------------------------------------
Securities purchased by the Tax-Exempt Funds may include variable and
floating rate instruments. The interest rates on such instruments are not fixed
and vary with changes in the particular interest rate benchmarks or indexes.
Unrated variable and floating rate instruments will be purchased by the Funds
based upon the Adviser's determination that their quality at the time of
purchase is comparable to at least the minimum ratings set forth on page 3. In
some cases a Fund may require that the issuer's obligation to pay the principal
be backed by an unconditional and irrevocable bank letter or line of credit,
guarantee or commitment to lend. Although there may be no active secondary
market with respect to a particular variable or floating rate instrument
purchased by a Fund, the Fund may (at any time or during specified intervals
within a prescribed period, depending upon the instrument involved) demand
payment in full of the principal and may resell the instrument to a third party.
The absence of an active secondary market, however, could make it difficult for
a Fund to dispose of a variable or floating rate instrument in the event the
issuer defaulted on its payment obligation or during periods when
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<PAGE>
the Fund is not entitled to exercise its demand rights. In such cases, the Fund
could suffer a loss with respect to the instrument.
Portfolio Turnover
------------------
Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with a
Fund's investment objective. Portfolio investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold the investments. A high rate
of portfolio turnover may involve correspondingly greater transaction costs,
which must be borne directly by a Fund and ultimately by its shareholders.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
High portfolio turnover may result in the realization of substantial net capital
gains. To the extent that net short-term gains are realized, any distributions
resulting from such gains are considered ordinary income for federal income tax
purposes. (See "Additional Information Concerning Taxes.")
Investment Limitations
- ----------------------
The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of a Company or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of such Company or such Fund, or (b) 67% or more of the shares of such
Company or such Fund present at a meeting if more than 50% of the outstanding
shares of such Company or such Fund are represented at the meeting in person or
by proxy. Investment limitations which are "operating policies" with respect to
the Funds may be changed by the Companies' Boards of Directors without
shareholder approval.
The following investment limitations are fundamental with respect to
each Fund. No Fund may:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Tax-Exempt Funds' investment objectives, policies, and limitations may
be deemed to be underwriting; and except insofar as the Managed Income Fund
might be deemed to be an underwriter upon disposition of certain portfolio
securities acquired within the limitation on purchases of restricted securities;
2. Purchase or sell real estate, except that each Tax-Exempt Fund may
invest in Municipal Obligations secured by real estate or interests therein, and
the Managed Income and IT Managed Income Funds may purchase securities of
issuers which deal in real estate and may purchase securities which are secured
by interests in real estate;
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<PAGE>
3. Issue any senior securities, except insofar as any borrowing by
each Fund in accordance with its investment limitations might be considered to
be the issuance of a senior security; provided that each Fund may enter into
futures contracts and futures options;
4. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing, provided that each Fund may enter into futures contracts and
futures options. (This borrowing provision is included solely to facilitate the
orderly sale of portfolio securities to accommodate abnormally heavy redemption
requests and is not for leverage purposes.) A Fund will not purchase portfolio
securities while borrowings in excess of 5% of its total assets are outstanding;
5. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) with respect to the IT Tax-Exempt and LT
Tax-Exempt Funds, there is no limitation with respect to domestic bank
obligations or securities issued or guaranteed by the United States; any state
or territory; any possession of the U.S. government; the District of Columbia;
or any of their authorities, agencies, instrumentalities, or political
subdivisions, (b) with respect to the Managed Income Fund, there is no
limitation with respect to securities issued or guaranteed by the U.S.
government or domestic bank obligations, (c) with respect to the ST Tax-Exempt
Fund, there is no limitation with respect to securities issued or guaranteed by
the United States; any state or territory; any possession of the U.S.
government; the District of Columbia; or any of their authorities, agencies,
instrumentalities, or political subdivisions, (d) with respect to the ST
Government and IT Managed Income Funds, there is no limitation with respect to
securities issued or guaranteed by the U.S. government and (e) with respect to
the Fixed Income Funds, neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for purposes of
this policy; and
6. Purchase securities of any one issuer, other than U.S. government
obligations, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that up
to 25% of the value of its total assets may be invested without regard to this
5% limitation.
The following investment limitation is fundamental with respect to the
Fixed-Income Funds. Each Fixed-Income Fund may not:
7. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and (ii)
each Fund may lend portfolio securities in an amount not exceeding 30% of its
total assets.
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<PAGE>
The following investment limitation is fundamental with respect to the
IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds, but is an operating
policy with respect to the ST Tax-Exempt, ST Government and IT Managed Income
Funds. The Funds may not:
8. Purchase securities on margin, make short sales of securities, or
maintain a short position; provided that each Fund may enter into futures
contracts and futures options.
The following investment limitation is fundamental with respect to
each Tax-Exempt Fund. A Tax-Exempt Fund may not:
9. Make loans, except that each Tax-Exempt Fund may purchase or hold
debt obligations in accordance with its investment objective, policies, and
limitations.
The following investment limitation is fundamental with respect to the
IT Tax-Exempt and LT Tax-Exempt Funds, but is an operating policy with respect
to the ST Tax-Exempt Fund. A Tax-Exempt Fund may not:
10. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that a Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.
The following investment limitations are fundamental with respect to
the Managed Income Fund, but are operating policies with respect to the IT
Managed Income and ST Government Funds. A Fixed-Income Fund may not:
11. Invest in companies for the purpose of exercising management or
control;
12. Purchase foreign securities; provided that subject to the limit
described below, the IT Managed Income and Managed Income Funds may purchase (a)
dollar-denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and
13. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
-18-
<PAGE>
The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds. The IT Tax-Exempt, LT
Tax-Exempt and Managed Income Funds may not:
14. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that each Fund may enter into futures contracts and futures
options; and
15. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Funds may
enter into futures contracts and futures options.
The following investment limitation is fundamental with respect to the ST Tax-
Exempt, ST Government and IT Managed Income Funds. The ST Tax-Exempt, ST
Government and IT Managed Income Funds may not:
16. Purchase or sell commodities or commodity futures contracts, or
invest in oil, gas, or mineral exploration or development programs; provided
that the Funds may enter into futures contracts and futures options.
The following investment limitations are fundamental with respect to
the IT Tax-Exempt and LT Tax-Exempt Funds. Each of the IT Tax-Exempt and LT Tax-
Exempt Funds may not:
17. Knowingly invest more than 10% of the value of its total assets
in securities which may be illiquid in light of legal or contractual
restrictions on resale or the absence of readily available market quotations;
and
18. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation.
The following investment limitations are fundamental with respect to
the Managed Income Fund. The Managed Income Fund may not:
19. Knowingly invest more than 10% of the value of its total assets
in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available;
20. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years; and
21. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks if immediately after such
purchase (i) more than 5% of the value of its total assets would be invested in
obligations of any one foreign branch of the
-19-
<PAGE>
financial institution or domestic branch of a foreign bank, or (ii) more than
20% of its total assets would be invested in foreign branches of financial
institutions or in domestic branches of foreign banks.
* * *
In addition to the investment limitations described above, as a matter
of fundamental policy for each Fund, which may not be changed without the vote
of the holders of a majority of the Fund's outstanding shares, a Fund may not
invest in the securities of any single issuer if, as a result, the Fund holds
more than 10% of the outstanding voting securities of such issuer.
The Managed Income, IT Tax-Exempt and LT Tax-Exempt Funds will not
invest more than 25% of the value of their respective total assets in domestic
bank obligations.
In Investment Limitation No. 6 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the United States government, its agencies or
instrumentalities (including securities backed by the full faith and credit of
the United States) are deemed to be U.S. government obligations.
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts. The Funds do not
currently intend to invest in real estate investment trusts.
In addition to the above investment limitations, Excelsior Fund
currently intends to limit the IT Managed Income and Managed Income Funds'
investments in warrants so that, valued at the lower of cost or market value,
they do not exceed 5% of a Fund's net assets. For the purpose of this
limitation, warrants acquired by the IT Managed Income or Managed Income Fund in
units or attached to securities will be deemed to be without value.
The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.
The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities on
margin, short sales of securities and the maintenance of a short position; the
issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.
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<PAGE>
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Distributor
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Companies' sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.
At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Purchase of Shares
Shares of the Funds are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Companies' sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
shares in order to accommodate different types of investors.
Shares may be sold to customers ("Customers") of financial institutions
("Shareholder Organizations"). Shares are also offered for sale directly to
institutional investors
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<PAGE>
and to members of the general public. Different types of Customer accounts at
the Shareholder Organizations may be used to purchase shares, including eligible
agency and trust accounts. In addition, Shareholder Organizations may
automatically "sweep" a Customer's account not less frequently than weekly and
invest amounts in excess of a minimum balance agreed to by the Shareholder
Organization and its Customer in shares selected by the Customer. Investors
purchasing shares may include officers, directors, or employees of the
particular Shareholder Organization.
Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Companies. A
Shareholder Organization may elect to hold of record shares for its Customers
and to record beneficial ownership of shares on the account statements provided
by it to its Customers. If it does so, it is the Shareholder Organization's
responsibility to transmit to the Distributor all purchase requests for its
Customers and to transmit, on a timely basis, payment for such requests to Chase
Global Funds Services Company ("CGFSC"), the Funds' sub-transfer agent, in
accordance with the procedures agreed to by the Shareholder Organization and the
Distributor. Confirmations of all such Customer purchases (and redemptions)
will be sent by CGFSC to the particular Shareholder Organization. As an
alternative, a Shareholder Organization may elect to establish its Customers'
accounts of record with CGFSC. In this event, even if the Shareholder
Organization continues to place its Customers' purchase (and redemption)
requests with the Funds, CGFSC will send confirmations of such transactions and
periodic account statements directly to the shareholders of record. Shares in
the Funds bear the expense of fees payable to Shareholder Organizations for such
services. See "Shareholder Organizations."
Redemption Procedures
- ---------------------
Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Companies, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may
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<PAGE>
redeem all or part of their shares in accordance with any of the procedures
described below (these procedures also apply to Customers of Shareholder
Organizations for whom individual accounts have been established with CGFSC).
As discussed in the Prospectus, a redemption request for an amount in
excess of $50,000 per account, or for any amount if the proceeds are to be sent
elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for shares redeemed will
ordinarily be made by mail within five Business Days after receipt by CGFSC of
the redemption request in good order. Questions with respect to the proper form
for redemption requests should be directed to CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).
Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.
Other Redemption Information
- ----------------------------
The Companies may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.
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<PAGE>
In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Each Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. Each Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.
Under certain circumstances, the Companies may, at their discretion,
accept securities as payment for shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a bona fide
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a
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<PAGE>
program of systematic investing in a Fund while at the same time participating
in the Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and procedures and fees relating to, the Systematic Withdrawal
Plan directly from their Shareholder Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Companies or for Shares of Excelsior Institutional Trust. An exchange involves a
redemption of all or a portion of the shares of Excelsior Institutional Trust.
An exchange involves a redemption of all or a portion of the shares in a Fund
and the investment of the redemption proceeds in shares of another portfolio.
The redemption will be made at the per share net asset value of the shares being
redeemed next determined after the exchange request is received in good order.
The shares of the portfolio to be acquired will be purchased at the per share
net asset value of those shares next determined after receipt of the exchange
request in good order.
Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Retirement Plans
- ----------------
Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):
. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;
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<PAGE>
. Profit Sharing and Money-Purchase Plans for corporations and self-
employed individuals and their partners to benefit themselves and
their employees; and
. Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase
shares of the Funds pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.
Automatic Investment Program
- ----------------------------
The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, dollar cost averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using dollar cost averaging are purchased without
regard to their price on the day of investment or to market trends. In addition,
while Investors may find dollar cost averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his shares at a price which is
lower than their purchase price. The Companies may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently is
contemplated. An Investor may also implement the dollar cost averaging method on
his own initiative or through other entities.
Additional Information
- ----------------------
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of common stock, $.001 par
value per share; and Excelsior Tax-Exempt Fund's Charter authorizes its Board of
Directors to issue up to fourteen billion full and fractional shares of common
stock, $.001 par value per share. Both Charters authorize the
-26-
<PAGE>
respective Boards of Directors to classify or reclassify any unissued shares of
the respective Companies into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption.
Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the particular Company's Board of
Directors.
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued for
payment as described in the Prospectuses, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, shareholders
of that Fund are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the portfolios of the Company involved, of any general assets of
that Company not belonging to any particular portfolio of that Company which are
available for distribution. In the event of a liquidation or dissolution of
either Company, shareholders of such Company will be entitled to the same
distribution process.
Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of a
Company's outstanding shares may elect all of that Company's directors,
regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of each Company voting
without regard to class.
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which
-27-
<PAGE>
may be paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The exercise
of such authority by the Boards of Directors will be subject to the provisions
of the 1940 Act, and the Boards of Directors will not take any action described
in this paragraph unless the proposed action has been disclosed in writing to
the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote of
the Companies' Common Stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Companies' Charters, the
Companies may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding common stock of the particular
Company voting without regard to class.
Certificates for shares will not be issued unless expressly requested in
writing to CGFSC and will not be issued in fractional shares.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The business and affairs of the Funds are managed under the direction of
the Companies' Boards of Directors. The directors and executive officers of the
Companies, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Chairman of the Boards (since 1997),
238 June Road President and Treasurer and President, Treasurer and Director of the
Stamford, CT 06903 Companies (since 1995); Chairman of the Board
Age: 68 (since 1997), and President, Treasurer and
Trustee of Excelsior Institutional Trust (since
1995); Chairman of the Board (from 1997 to
1999), and President, Treasurer and Trustee of
Excelsior Funds (from 1995 to 1999); Vice
Chairman of U.S. Trust Corporation and U.S.
</TABLE>
________________________________
/1/ This director is considered to be an "interested person" of the Companies as
defined in the 1940 Act.
-28-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Trust New York (from February 1990 until
September 1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).
Donald L. Campbell Director Retired; Director of the Companies (since
333 East 69th Street 1984); Director of UST Master Variable Series,
Apt. 10-H Inc. (from 1994 to June 1997); and Trustee of
New York, NY 10021 Excelsior Institutional Trust (since 1995).
Age: 73
Rodman L. Drake Director Director of the Companies (since 1996); Trustee
Continuation Investments of Excelsior Institutional Trust (since 1994);
Group, Inc. Trustee of Excelsior Funds (from 1994 to 1999);
1251 Avenue of the Americas, Chairman, MetroCashcard International, Inc.
9th Floor (1999-present); Director, Hotelivision, Inc.
New York, NY 10020 (1999-present); Director, Alliance Group
Age: 56 Services, Inc. (1998-present); Director,
Parsons Brinkerhoff, Inc. (engineering firm)
(since 1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment and
consulting firm) (1994-1997); Director,
Hyperion Total Return Fund, Inc. and three
other funds for which Hyperion Capital
Management, Inc. serves as investment adviser
(since 1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993 to 1996);
Director, The Latin America Smaller Companies
Fund, Inc. (1993-1998); Member of Advisory
Board, Argentina Private Equity Fund L.P. (from
1992 to 1996) and Garantia L.P. (Brazil) (from
1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of the Companies (since
913 Franklin Lake Road 1984); Director of UST Master Variable Series,
Franklin Lakes, NJ 07417 Inc. (from 1994 to June 1997); and Trustee of
Age: 74 Excelsior Institutional Trust (since 1995).
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since
2320 Cumberland Road 1986); Director of UST Master Variable Series,
Charlottesville, Inc. (from 1994 to June 1997); Trustee of
VA 22901-7726 Excelsior Institutional Trust (since 1995);
Age: 79 Director, Deutsche Bank Financial, Inc. (since
1989); Director, The Harbus Corporation (since
1951); and Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).
Jonathan Piel Director Director of the Companies (since 1996); Trustee
558 E. 87th Street of Excelsior Institutional Trust (since 1994);
New York, NY 10128 Trustee of Excelsior Funds (from 1994 to 1999);
Age: 60 Vice President and Editor, Scientific American,
Inc. (from 1986 to 1994); Director, Group for
The South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts Institute
of Technology (since 1984).
Robert A. Robinson Director Director of the Companies (since 1987);
Church Pension Group Director of UST Master Variable Series, Inc.
445 Fifth Avenue (from 1994 to June 1997); Trustee of Excelsior
New York, NY 10016 Institutional Trust (since 1995); President
Age: 73 Emeritus, The Church Pension Fund and its
affiliated companies (since 1966); Trustee,
H.B. and F.H. Bugher Foundation and Director of
its wholly owned subsidiaries -- Rosiclear Lead
and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director, Morehouse
Publishing Co. (1974-1998); Trustee, HSBC Funds
Trust and HSBC Mutual Funds Trust (since 1982);
and Director, Infinity Funds, Inc. (since 1995).
</TABLE>
-30-
<PAGE>
<TABLE>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Alfred C. Tannachion/2/ Director Retired; Director of the Companies (since
26549 Pine Meadows Drive 1985); Chairman of the Board of the Companies
Spring Hill, FL 34606 (1991-1997) and Excelsior Institutional Trust
Age: 74 (1996-1997); President and Treasurer of the
Companies (1994-1997) and Excelsior
Institutional Trust (1996-1997); Chairman of
the Board, President and Treasurer of UST
Master Variable Series, Inc. (1994-1997); and
Trustee of Excelsior Institutional Trust (since
1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia,
PA 19103-6996
Age: 56
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia,
PA 19103-6996
Age: 40
Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Secretary Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 38
</TABLE>
_______________________________
/2/ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-31-
<PAGE>
<TABLE>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Patricia M. Leyne Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (since August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 32 Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds Services
Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services Company
(from September 1995 to November 1996); Fund
Administrator, Chase Global Funds Services
Company (from February 1993 to September 1995).
</TABLE>
Each director receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to the Companies. The employees of
CGFSC do not receive any compensation from the Companies for acting as officers
of the Companies. No person who is currently an officer, director or employee of
the Adviser serves as an officer, director or employee of the Companies. As of
May 18, 2000, the directors and officers of each Company as a group owned
beneficially less than 1% of the outstanding shares of each fund of each
Company, and less than 1% of the outstanding shares of all funds of each Company
in the aggregate.
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal year.
-32-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Accrued as Annual from the Company
Aggregate Part of Benefits and Fund
Name of Compensation from Fund Upon Complex* Paid
Person/Position the Company Expenses Retirement to Directors
--------------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Donald L. Campbell $______ None None $______ (3)**
Director
Rodman L. Drake $______ None None $______ (4)**
Director
Joseph H. Dugan $______ None None $______ (3)**
Director
Wolfe J. Frankl $______ None None $______ (3)**
Director
Jonathan Piel $______ None None $______ (4)**
Director
Robert A. Robinson $______ None None $______ (3)**
Director
Alfred C. Tannachion $______ None None $______ (3)**
Director
Frederick S. Wonham $______ None None $______ (4)**
Chairman of the Board,
President and Treasurer
</TABLE>
____________________________
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund,
Excelsior Institutional Trust, and, until December 15, 1999, Excelsior
Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as
-33-
<PAGE>
co-investment advisers to the Funds. In the Investment Advisory Agreements, the
Adviser has agreed to provide the services described in the Prospectuses. The
Adviser has also agreed to pay all expenses incurred by it in connection with
its activities under the respective agreements other than the cost of
securities, including brokerage commissions, if any, purchased for the
Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Funds pursuant to an advisory agreement substantially similar to
the Investment Advisory Agreement currently in effect for the Funds.
For the services provided and expenses assumed pursuant to its
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly at the annual rate of .30% of the average daily
net assets of the ST Government and ST Tax-Exempt Funds; .35% of the average
daily net assets of the IT Managed Income and IT Tax-Exempt Funds; .50% of the
average daily net assets of the LT Tax-Exempt Fund; and .75% of the average
daily net assets of the Managed Income Fund.
From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to them by a Fund, which waiver may be terminated
at any time.
For the fiscal years ended March 31, 2000, 1999 and 1998, the
particular Company paid the Adviser fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Short-Term Government Fund $ 98,059 $ 72,860
Intermediate-Term Managed $ 317,118 $ 260,708
Income Fund
Managed Income Fund $1,287,808 $1,203,851
Short-Term Tax-Exempt $ 92,164 $ 99,010
Securities Fund
Intermediate-Term $ 844,392 $ 746,025
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $ 690,785 $ 545,298
</TABLE>
-34-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the Adviser
voluntarily agreed to waive a portion of its advisory fee for certain funds.
During the periods stated, these waivers reduced advisory fees by the following:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year ended
ended ended March 31, 1998
March 31, 2000 March 31, 1999 --------------
-------------- --------------
<S> <C> <C> <C>
Short-Term Government Fund $ 40,855 $ 21,549
Intermediate-Term Managed $ 74,201 $ 42,260
Income Fund
Managed Income Fund $272,533 $243,873
Short-Term Tax-Exempt $ 28,715 $ 24,358
Securities Fund
Intermediate-Term $186,350 $133,635
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $150,919 $ 89,459
</TABLE>
The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreement to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.
As discussed in the prospectus, U.S. Trust Corporation, parent of
U.S. Trust, and The Charles Schwab Corporation entered into a definitive
agreement to merge on January 12, 2000. After the merger, U.S. Trust
Corporation will be a wholly-owned subsidiary of Schwab. The merger is
anticipated to close by July 2000; however, it is subject to a number of
conditions, including certain regulatory and shareholder approvals.
U.S. Trust will continue to serve as investment adviser to the Funds
after the merger. The merger, however, will represent a change of ownership of
U.S. Trust's parent corporation and, as such, will have the effect under the
1940 Act of terminating the existing investment advisory agreements (the
"Existing Agreements"). Accordingly, the
-35-
<PAGE>
Shareholders of the Funds have been asked to approve a new investment advisory
agreements ("New Agreements") between the Funds and U.S. Trust. The New
Agreement will become effective upon the date of the merger. If the merger is
not consummated, the Fund will operate under the New Agreements, which will
become effective upon the date of termination of the merger agreement.
The New Agreements contain substantially the same terms and conditions
as the Existing Agreements, and the advisory fee will remain the same under the
New Agreements.
CGFSC, Federated Administrative Services, an affiliate of the
Distributor, and U.S. Trust Company (together, the "Administrators") serve as
the Companies' administrators and provide the Funds with general administrative
and operational assistance. Under the Administration Agreements, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt interest dividends" and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Funds' administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Funds.
The Administrators also provide administrative services to the other
investment portfolios of the Companies and to all of the investment portfolios
of Excelsior Institutional Trust which are also advised by U.S. Trust and its
affiliates and distributed by the Distributor. For services provided to all
portfolios of the Companies and Excelsior Institutional Trust (except for the
international portfolios of Excelsior Fund and Excelsior Institutional Trust),
the Administrators are entitled jointly to fees, computed daily and paid
monthly, based on the combined aggregate average daily net assets of the three
companies (excluding the international portfolios of Excelsior Fund and
Excelsior Institutional Trust) as follows:
-36-
<PAGE>
Combined Aggregate Average Daily
Net Assets of Excelsior Tax-Exempt Fund,
Excelsior Fund and Excelsior Institutional Trust
(excluding the international portfolios of
Excelsior Fund and Excelsior Institutional Trust)
------------------------------------------------
Annual Fee
----------
First $200 million................................. 0.200%
Next $200 million.................................. 0.175%
Over $400 million.................................. 0.150%
Administration fees payable to the Administrators by each portfolio of
the Companies and Excelsior Institutional Trust are allocated in proportion to
their relative average daily net assets at the time of determination. From time
to time, the Administrators may voluntarily waive all or a portion of the
administration fee payable to them by a Fund, which waiver may be terminated at
any time.
-37-
<PAGE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Short-Term Government Fund $ 70,684 $ 48,138
Intermediate-Term Managed $170,673 $132,050
Income Fund
Managed Income Fund $316,445 $294,955
Short-Term Tax-Exempt $ 61,646 $ 62,813
Securities Fund
Intermediate-Term $449,336 $383,863
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $243,351 $189,687
</TABLE>
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived administration fees as follows:
<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Short-Term Government Fund $ 162 $ 11
Intermediate-Term Managed $ 389 $ 390
Income Fund
Managed Income Fund $ 1,864 $ 381
Short-Term Tax-Exempt $ 3 $ 104
Securities Fund
Intermediate-Term $ 1,245 $ 674
Tax-Exempt Fund
</TABLE>
-38-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Long-Term Tax-Exempt Fund $14,210 $4,549
</TABLE>
Shareholder Organizations
- -------------------------
The Companies have entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40% of the average daily net assets of the Fund's shares beneficially owned by
Customers of the Shareholder Organization. Such services may include: (a) acting
as recordholder of shares; (b) assisting in processing purchase, exchange and
redemption transactions; (c) transmitting and receiving funds in connection with
Customer orders to purchase, exchange or redeem shares; (d) providing periodic
statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Companies to Customers;
and (g) providing or arranging for the provision of other related services. It
is the responsibility of Shareholder Organizations to advise Customers of any
fees that they may charge in connection with a Customer's investment. Until
further notice, the Adviser and Administrators have agreed to waive fees payable
by a Fund in an aggregate amount equal to administrative service fees payable by
that Fund.
The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Companies'
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Companies' Boards of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Companies will be
committed to the discretion of such Disinterested Directors.
For the fiscal years ended March 31, 2000, the particular Company made
payments to Shareholder Organizations in the following amounts:
-39-
<PAGE>
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
Short-Term Government Fund
Intermediate-Term Managed
Income Fund
Managed Income Fund
Short-Term Tax-Exempt
Securities Fund
Intermediate-Term Tax-Exempt
Fund
Long-Term Tax-Exempt Fund
</TABLE>
For the fiscal years ended March 31, 1999, the particular Company made
payments to Shareholder Organizations in the following amounts:
<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
Short-Term Government Fund $ 41,017 $ 40,538
Intermediate-Term Managed $ 74,590 $ 73,338
Income Fund
Managed Income Fund $ 66,277 $ 64,528
Short-Term Tax-Exempt $ 28,718 $ 28,709
Securities Fund
Intermediate-Term Tax-Exempt $187,595 $182,945
Fund
Long-Term Tax-Exempt Fund $165,129 $114,441
</TABLE>
-40-
<PAGE>
For the fiscal years ended March 31, 1998, the particular Company made
payments to Shareholder Organizations in the following amounts:
Amounts Paid to
Total Paid Affiliates
of U.S. Trust
Short-Term Government Fund $134,970 $133,194
Intermediate-Term Managed $ 96,449 $ 86,789
Income Fund
Managed Income Fund
Short-Term Tax-Exempt $ 67,805 $ 67,453
Securities Fund
Intermediate-Term Tax-Exempt $120,297 $117,511
Fund
Long-Term Tax-Exempt Fund $ 994 $ 994
Expenses
- --------
Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include:
taxes; interest; fees (including fees paid to the Companies' directors and
officers who are not affiliated with the Distributor or the Administrators); SEC
fees; state securities qualification fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders;
advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; cost of independent pricing
service; costs of shareholder reports and meetings; and any extraordinary
expenses. The Funds also pay for any brokerage fees and commissions in
connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under
the Custodian Agreements, Chase has agreed to: (i) maintain a separate account
or accounts in the name of the Funds; (ii) make receipts and disbursements of
money on behalf of the Funds; (iii) collect and receive income and other
payments and distributions on account of the Funds' portfolio
-41-
<PAGE>
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to each Company's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreements, notwithstanding any delegation. Communications
to the custodian should be directed to Chase, Mutual Funds Service Division, 3
Chase MetroTech Center, 8/th/ Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for their meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to
each Company's Board of Directors concerning the Funds' operations. For its
transfer agency, dividend-disbursing, and subaccounting services, U.S. Trust New
York is entitled to receive $15.00 per annum per account and subaccount. In
addition, U.S. Trust New York is entitled to be reimbursed for its out-of-pocket
expenses for the cost of forms, postage, processing purchase and redemption
orders, handling of proxies, and other similar expenses in connection with the
above services. U.S. Trust New York is located at 114 W. 47/th/ Street, New
York, New York 10036.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreements, notwithstanding any delegation. Pursuant to this provision in the
agreements, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Companies for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Adviser is responsible for, makes decisions with respect to and places
orders for all purchases and sales of all portfolio securities of each of the
Funds. Purchases and sales of portfolio securities will usually be principal
transactions without brokerage commissions.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Funds' turnover rates may
remain higher than those of many other
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investment companies with similar investment objectives and policies. However,
since brokerage commissions are not normally paid on instruments purchased by
the Funds, portfolio turnover is not expected to have a material effect on the
net income of any of the Funds. The Funds' portfolio turnover rates may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Prospectuses for the Funds' portfolio turnover
rates.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
With respect to over-the-counter transactions, the Funds, where possible, will
deal directly with dealers who make a market in the securities involved, except
in those situations where better prices and execution are available elsewhere.
The Investment Advisory Agreements between the Companies and the
Adviser provide that, in executing portfolio transactions and selecting brokers
or dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems 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 and
whether such broker or dealer is selling shares of the Companies, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Companies'
Boards of Directors from time to time with respect to the extent and
continuation of the policy, to cause the Funds to pay a broker which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker for effecting the same transaction, provided that the
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser to the accounts as to which it exercises
investment discretion. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of stocks and their comparative earnings, or broad overviews of the stock
market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fee payable by the Funds. Such information may
be useful to the Adviser in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Funds.
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Portfolio securities will not be purchased from or sold to the
Adviser, the Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of the Funds and
another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Funds and such other
investment company or common trust fund. In some instances, this investment
procedure may adversely affect the price paid or received by the Funds or the
size of the position obtained by the Funds. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Funds with
those to be sold or purchased for other investment companies or common trust
funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 2000, ____.
PORTFOLIO VALUATION
Assets in the Funds which are traded on a recognized stock exchange
are valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded on only over-the-counter markets are
valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the most recent
bid and asked prices. A futures contract is valued at the last sales price
quoted on the principal exchange or board of trade on which such contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices. Restricted securities and securities or other assets for which market
quotations are not readily available are valued at fair value pursuant to
guidelines adopted by the Companies' Boards of Directors. Absent unusual
circumstances, portfolio securities maturing in 60 days or less are normally
valued at amortized cost. The net asset value of shares in the Funds will
fluctuate as the market value of their portfolio securities changes in response
to changing market rates of interest and other factors.
Portfolio securities held by the IT Managed Income and Managed Income
Funds which are primarily traded on foreign securities exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an event subsequent to the time when value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors under the
direction of the Boards of Directors. A security which is listed or traded on
more than one
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exchange is valued at the quotation on the exchange determined to be the primary
market for such security. Investments in foreign debt securities having a
maturity of 60 days or less are valued based upon the amortized cost method. All
other foreign securities are valued at the last current bid quotation if market
quotations are available, or at fair value as determined in accordance with
guidelines adopted by the Boards of Directors. For valuation purposes,
quotations of foreign securities in foreign currency are converted to U.S.
dollars equivalent at the prevailing market rate on the day of conversion. Some
of the securities acquired by the Funds may be traded on foreign exchanges or
over-the-counter markets on days which are not Business Days. In such cases, the
net asset value of the shares may be significantly affected on days when
investors can neither purchase nor redeem a Fund's shares.
The Administrators have undertaken to price the securities in the
Funds' portfolios and may use one or more pricing services to value certain
portfolio securities in the Funds where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations so established will be reviewed by the
Administrators under the general supervision of the Boards of Directors.
INDEPENDENT AUDITORS
--------------------
________________, independent auditors, ________________ serve as
auditors of the Companies. The Funds' Financial Highlights included in the
Prospectuses and the financial statements for the fiscal year ended March 31,
____ incorporated by reference in this Statement of Additional Information have
been audited by _______________ for the periods included in their reports
thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103, is
counsel to the Companies.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
- ---------
For federal income tax purposes, each Fund is treated as a separate
corporate entity and has qualified and intends to qualify as a regulated
investment company. Such qualification generally relieves a Fund of liability
for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, the Fund would be subject to federal tax
treatment afforded regulated investment companies, the Fund would be subject to
federal tax on all of its taxable income at regular corporate rates, without any
deduction for distributions to shareholders. In such event,
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dividend distributions would be taxable as ordinary income to shareholders to
the extent of such Fund's current and accumulated earnings and profits and would
be eligible for the dividends received deduction in the case of corporate
shareholders. Moreover, if a Fund were to fail to make sufficient distributions
in year, the Fund would be subject to corporate income taxes and/or excise taxes
in respect of the shortfall or, if the shortfall is large enough, the Fund could
be disqualified as a regulated investment company.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so either that they are not subject to backup withholding or that they are
"exempt recipients."
The Tax-Exempt Funds are not intended to constitute a balanced
investment program and are not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Exempt Funds would not be suitable for tax-exempt
institutions or for retirement plans qualified under Section 401 of the Code,
H.R. 10 plans and individual retirement accounts because such plans and accounts
are generally tax-exempt and, therefore, not only would not gain any additional
benefit from the Tax-Exempt Funds' dividends being tax-exempt, but such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. In addition, the Tax-Exempt Funds may not be an appropriate investment for
entities which are "substantial users" of facilities financed by private
activity bonds or "related persons" thereof. "Substantial user" is defined under
the Treasury Regulations to include a non-exempt person who regularly uses a
part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, who
occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
In order for a Tax-Exempt Fund to pay exempt-interest dividends for
any taxable year, at least 50% of the aggregate value of such Fund's portfolio
must consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, each of the
Tax-Exempt Funds will notify its shareholders of the portion of the dividends
paid by that Fund which constitutes an exempt-interest dividend with respect to
such
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<PAGE>
taxable year. However, the aggregate amount of dividends so designated by that
Fund cannot exceed the excess of the amount of interest exempt from tax under
Section 103 of the Code received by that Fund during the taxable year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
The percentage of total dividends paid by each of the Tax-Exempt Funds with
respect to any taxable year which qualifies as exempt-interest dividends will be
the same for all shareholders receiving dividends from that Tax-Exempt Fund for
such year.
Generally, if a shareholder holds Tax-Exempt Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six-month holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation. Share owners may also be
subject to state and local taxes on distributions and redemptions. State income
taxes may not apply however to the portions of each Fund's distributions, if
any, that are attributable to interest on federal securities or interest on
securities of the particular state. For example, interest earned on the New York
Intermediate-Term Tax-Exempt Fund will generally be exempt from federal, New
York State and New York City taxes; and interest earned on the California Tax-
Exempt Income Fund will generally be exempt from federal and California taxes.
Shareowners should consult their tax advisers regarding the tax status of
distributions in their state and locality.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
Yields and Performance
- ----------------------
The Funds may advertise the standardized effective 30-day (or one
month) yields calculated in accordance with the method prescribed by the SEC for
mutual funds. Such yield will be calculated separately for each Fund according
to the following formula:
a-b
Yield = 2 [(-------- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
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b = expenses accrued for the period (net of
reimbursements).
c = average daily number of shares outstanding that were
entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), each of the Funds computes the yield to maturity
of any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. Also, the maturity of a debt obligation with a call
provision is deemed to be the next call date on which the obligation reasonably
may be expected to be called or, if none, the maturity date. Each of the Funds
calculates interest gained on tax-exempt obligations issued without original
issue discount and having a current market discount by using the coupon rate of
interest instead of the yield to maturity. In the case of tax-exempt obligations
with original issue discount, where the discount based on the current market
value exceeds the then-remaining portion of original issue discount, the yield
to maturity is the imputed rate based on the original issue discount
calculation. Conversely, where the discount based on the current market value is
less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by each of the Funds to all shareholder accounts and
to the particular series of shares in proportion to the length of the base
period and that Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the maximum offering price per share (variable "d" in
the formula).
Based on the foregoing calculations, the effective yields for shares
of the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the 30-day period ended March 31, 2000 were
____%, ____%, ____%, ____%, ____% and ____%, respectively.
The "tax-equivalent" yield of the ST Tax-Exempt, IT Tax-Exempt and LT
Tax-Exempt Funds is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from federal income tax by one minus a
stated federal income tax rate and (b) adding that figure to that portion, if
any, of the yield that is not exempt from federal income tax. Tax-equivalent
yields assume the payment of federal income taxes at a rate of 31%. Based on the
foregoing calculations, the tax-equivalent yields of the ST Tax-Exempt, IT Tax-
Exempt and LT
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Tax-Exempt Funds for the 30-day period ended March 31, 2000 were ____%, ____%
and ____%, respectively.
Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
years.
Each Fund may also advertise the "aggregate total return" for its
shares, which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Based on the foregoing calculations, the average annual total returns
for shares of the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT
Managed Income and Managed Income Funds for the one year period ended March 31,
2000 were ____%, ____%, ____%, ____%, ____% and ____%, respectively. The
average annual total returns for
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the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the five year period ended March 31, 2000
were ____%, ____%, ____%, ____%, ____% and ____%, respectively. The average
annual total returns for shares of the ST Tax-Exempt Securities, ST Government
and IT Managed Income Funds for the period from December 31, 1992 (commencement
of operations) to March 31, 2000 were ____%, ____% and ____%, respectively. The
average annual total returns for the IT Tax-Exempt, LT Tax-Exempt and Managed
Income Funds for the ten year period ended March 31, 2000 were ____%, ____% and
____%, respectively.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.
The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Total return and yield data as reported in national
financial publications such as Money Magazine, Forbes, Barron's, The Wall Street
Journal and The New York Times, or in publications of a local or regional
nature, may also be used in comparing the performance of a Fund. Advertisements,
sales literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and technologies that together with market
conditions and events, materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation's of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications
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<PAGE>
to shareholders may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well as
the views of the Adviser as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, Treasury bills and shares of a
Fund. In addition, advertisement, sales literature or shareholder communications
may include a discussion of certain attributes or benefits to be derived by an
investment in a Fund. Such advertisements or communicators may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail therein.
Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of a Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Funds with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that the
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with
respect to accounts of Customers that have invested in shares will not be
included in calculations of yield and performance.
CODE OF ETHICS
The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics which allow for personnel subject to the codes to
invest in securities including securities that may be purchased or held by the
Funds.
MISCELLANEOUS
As used herein, "assets allocable to a Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company involved not belonging to a particular portfolio of that Company.
In determining the net asset value of a Fund's shares, assets belonging to the
Fund are charged with the direct liabilities in respect of that Fund and with a
share of the general liabilities of the Company involved which are normally
allocated in proportion to the relative asset values of the Company's portfolios
at the time of allocation. Subject to the provisions of the Companies'
Charters, determinations by the Boards of Directors as to the direct and
allocable liabilities and the allocable portion of any general assets with
respect to a particular Fund are conclusive.
As of May 18, 2000, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding shares as agent or custodian for
their customers, but did not own
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such shares beneficially because they did not have voting or investment
discretion with respect to such shares.
As of May 18, 2000, the name, address and percentage ownership of each
person, in addition to U.S. Trust and its affiliates, that owned beneficially or
of record 5% or more of the outstanding shares of a Fund were as follows:
SHORT-TERM GOVERNMENT SECURITIES FUND: U.S. Trust Company of New York, Trustee,
FBO U.S. Trust Plan, Attn: Sandra Woolcock, 4380 SW Macadam Ave., Suite 450,
Portland, Oregon 97201, 12.73%; MANAGED INCOME FUND: U.S. Trust Retirement Fund,
c/o United States Trust Company of New York, 114 West 47th Street, New York, New
York 10036, 47.23%; and U.S. Trust Company of New York, Trustee, FBO U.S. Trust
Plan, Attn: Sandra Woolcock, 4380 SW Macadam Ave., Suite 450, Portland, Oregon
97201, 5.42%; LONG-TERM TAX-EXEMPT FUND: Charles Schwab & Co., Inc., Special
Custody A/C for, Attn: Mutual Funds, 101 Montgomery Street, San Francisco,
California 94104, 6.83%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, ___ (the
"_____ Annual Reports") Reports for the Funds are incorporated in this Statement
of Additional Information by reference. No other parts of the ______ Annual
Reports are incorporated by reference herein. The financial statements included
in the ______ Annual Reports for the Funds have been audited by the Companies'
independent auditors, ________________, whose reports thereon also appear in the
____ Annual Reports and are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Additional copies of the ______ Annual Reports may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
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APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current opinion of
the creditworthiness of an obligor with respect to financial obligations having
an original maturity of no more than 365 days. The following summarizes the
rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
- -----------------------------------------
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own
A-1
<PAGE>
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
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<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates uncertain capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
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<PAGE>
Thomson Financial BankWatch short-term ratings assess the likelihood
of an untimely payment of principal and interest of debt instruments with
original maturities of one year or less. The following summarizes the ratings
used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as non-
investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
A-4
<PAGE>
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"c" - The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while
A-5
<PAGE>
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and interest-
only and principal-only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy. Debt obligations
of issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds 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 risk appear somewhat larger than in the "Aaa"
securities.
"A" - Bonds 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate
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<PAGE>
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
A-7
<PAGE>
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
A-8
<PAGE>
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations
in this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% -90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.
"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive," indicating a
potential upgrade, "Negative," for a potential downgrade, or "Evolving," if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
A-9
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
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<PAGE>
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG- 1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG- 2"/"VMIG-2" - This designation denotes high quality. Margins of
protection that are ample although not so large as in the preceding group.
"MIG- 3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG- 4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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<PAGE>
EXCELSIOR FUNDS, INC.
FORM N-1A
---------
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Articles of Incorporation of Registrant dated August 1,
1984 (4).
(2) Articles Supplementary of Registrant dated October 29,
1985 (4).
(3) Articles Supplementary of Registrant dated September
30, 1986 (4).
(4) Articles Supplementary of Registrant dated April 10,
1987 (4).
(5) Articles Supplementary of Registrant dated April 27,
1990 (4).
(6) Articles Supplementary of Registrant dated October 26,
1990 (4).
(7) Articles Supplementary of Registrant dated January 29,
1991 (4).
(8) Articles Supplementary of Registrant dated December 23,
1992 (4).
(9) Articles Supplementary of Registrant dated August 31,
1995 (1).
<PAGE>
(10) Articles Supplementary of Registrant dated December 28,
1995 (1).
(11) Articles Supplementary of Registrant dated September
11, 1997 (3).
(12) Articles Supplementary of Registrant dated December 22,
1997 (4).
(13) Articles Supplementary of Registrant dated November 13,
1998 (5).
(14) Articles of Amendment of Registrant dated July 1, 1999
(8).
(15) Articles Supplementary of Registrant dated January 3,
2000 (8).
(16) Articles Supplementary of Registrant dated March 7,
2000 (12).
(b) (1) Amended and Restated By-Laws of Registrant dated
February 2, 1995 (3).
(2) Amendment No. 1 to Amended and Restated By-Laws of
Registrant dated May 16, 1997 (3).
(c) (1) Articles VI, VII, VIII and X of Registrant's Articles
of Incorporation dated August 1, 1984 (4).
(2) Articles I, II, IV and VI of Registrant's Amended and
Restated By-Laws dated February 2, 1995 (3).
(d) (1) Investment Advisory Agreement among Registrant, U.S.
Trust Company of Connecticut and United States Trust Company
of New York dated May 16, 1997 with respect to the Money
Fund, Government Money Fund,
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<PAGE>
Blended Equity Fund, Small Cap Fund, Long-Term Supply of
Energy Fund, Productivity Enhancers Fund, Environmentally-
Related Products and Services Fund, Aging of America Fund,
Communication and Entertainment Fund, Value and
Restructuring Fund, Global Competitors Fund, Latin America
Fund, Pacific/Asia Fund, Pan European Fund, Short-Term
Government Securities Fund and Intermediate-Term Managed
Income Fund (2).
(2) Amendment No. 1 dated July 25, 1997 to the Investment
Advisory Agreement among Registrant, U.S. Trust Company of
Connecticut and United States Trust Company of New York
dated May 16, 1997 (adding the Large Cap Growth and Real
Estate Funds) (3).
(3) Amendment No. 2 dated November 14, 1997 to the
Investment Advisory Agreement among Registrant, U.S. Trust
Company of Connecticut and United States Trust Company of
New York dated May 16, 1997 (adding the Emerging Markets
Fund) (4).
(4) Form of Amendment No. 3 to the Investment Advisory
Agreement among Registrant, U.S. Trust Company and United
States Trust Company of New York dated (to become effective
on the date of commencement of operations of the Technology
Fund) (9).
(5) Investment Advisory Agreement among Registrant, U.S.
Trust Company of Connecticut and United States Trust Company
of New York dated May 16, 1997 with respect to the Managed
Income Fund (2).
(6) Investment Advisory Agreement among Registrant, U.S.
Trust Company of Connecticut and United States Trust Company
of New York dated May 16, 1997 with respect to the Income
and Growth Fund (2).
-3-
<PAGE>
(7) Investment Advisory Agreement among Registrant, U.S.
Trust Company of Connecticut and United States Trust Company
of New York dated May 16, 1997 with respect to the
International Fund (2).
(8) Investment Advisory Agreement among Registrant, U.S.
Trust Company of Connecticut and United States Trust Company
of New York dated May 16, 1997 with respect to the Treasury
Money Fund (2).
(9) Form of Investment Advisory Agreement among Registrant
(on behalf of the Technology Fund), U.S. Trust Company and
United States Trust Company of New York (to become effective
on the date of the merger of The Charles Schwab Corporation
with U.S. Trust Corporation (parent company of the
investment adviser)) (10).
(10) Form of Investment Advisory Agreement among Registrant
(on behalf of the Latin America, Pacific/Asia, Pan European,
Emerging Markets and International Funds), U.S. Trust
Company and United States Trust Company of New York (to
become effective on the date of the merger of The Charles
Schwab Corporation with U.S. Trust Corporation (parent
company of the investment adviser)) (11).
(11) Form of Investment Advisory Agreement among Registrant
(on behalf of the Money, Government Money, Blended Equity,
Small Cap, Energy and Natural Resources, Value and
Restructuring, Treasury Money, Managed Income, Short-Term
Government Securities, Intermediate-Term Managed Income,
Real Estate and Large Cap Growth Funds), U.S. Trust Company
and United States Trust Company of New York (to become
effective on the date of the merger of The Charles Schwab
Corporation with U.S. Trust Corporation (parent company of
the investment adviser)) (11).
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<PAGE>
(e) (1) Amended and Restated Distribution Contract dated July
31, 1998 between the Registrant and Edgewood Services, Inc.
(5).
(2) Form of Exhibit A to the Amended and Restated
Distribution Contract (adding the Technology Fund) (9).
(f) None.
(g) (1) Custody Agreement between the Registrant and The Chase
Manhattan Bank dated September 1, 1995 (as amended and
restated on August 1, 1997) (3).
(2) Amendment No. 1 dated May 22, 1998 to the Custody
Agreement dated September 1, 1995 (as amended and restated
on August 1, 1997) between the Registrant and The Chase
Manhattan Bank (5).
(3) Amendment No. 2 dated May 22, 1998 to the Custody
Agreement dated September 1, 1995 (as amended and restated
on August 1, 1997, between the Registrant and The Chase
Manhattan Bank (5).
(4) Amendment No. 3 dated July 31, 1998 to the Custody
Agreement dated September 1, 1995 (as amended and restated
on August 1, 1997) between the Registrant and The Chase
Manhattan Bank (5).
(5) Amended Exhibit A dated November 28, 1997 to the Custody
Agreement dated September 1, 1995 (as amended and restated
on August 1, 1997) (4).
(6) Form of Amended Exhibit A to the Custody Agreement dated
September 1, 1995 (as amended and restated on August 1,
1997) (adding the Technology Fund) (9).
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<PAGE>
(h) (1) Amended and Restated Administration Agreement dated July
31, 1998 among the Registrant, Chase Global Funds Services
Company, Federated Administrative Services and U.S. Trust
Company of Connecticut (5).
(2) Form of Exhibit A to the Amended and Restated
Administration Agreement dated July 31, 1998 among the
Registrant, Chase Global Funds Services Company, Federated
Administrative Services and U.S. Trust Company (adding the
Technology Fund) (9).
(3) Form of Exhibit B to the Amended and Restated
Administration Agreement dated July 31, 1998 among the
Registrant, Chase Global Funds Services Company, Federated
Administrative Services and U.S. Trust Company (adding the
Technology Fund) (9).
(4) Amended and Restated Mutual Funds Transfer Agency
Agreement dated as of July 31, 1998 between the Registrant
and United States Trust Company of New York (5).
(5) Letter Agreement dated September 11, 1997 with respect
to the Mutual Funds Transfer Agency Agreement dated
September 1, 1995 (4).
(6) Letter Agreement dated November 14, 1997 with respect to
the Mutual Funds Transfer Agency Agreement dated September
1, 1995 (4).
(7) Form of Letter Agreement with respect to the Amended and
Restated Mutual Funds Transfer Agency Agreement dated July
31, 1998 (9).
(8) Amended and Restated Mutual Funds Sub-Transfer Agency
Agreement dated as of July 31, 1998 between United States
Trust Company of New York and Chase Global Funds Services
Company (5).
-6-
<PAGE>
(9) Letter Agreement dated September 11, 1997 with respect
to the Mutual Funds Sub-Transfer Agency Agreement dated
September 1, 1995 (4).
(10) Letter Agreement dated November 14, 1997 with respect
to the Mutual Funds Sub-Transfer Agency Agreement dated
September 1, 1995 (4).
(11) Form of Letter Agreement with respect to the Mutual
Funds Sub-Transfer Agency Agreement dated July 31, 1998 (9).
(12) Amended and Restated Administrative Services Plan and
Related Form of Shareholder Servicing Agreement (3).
(13) Administrative Services Plan and Related Form of
Servicing Agreement with Respect to the Institutional Shares
of the Money Fund (7).
(14) Administrative Services Plan and Related Form of
Servicing Agreement with Respect to the Institutional Shares
of the Government Money Fund (12).
(15) Administrative Services Plan and Related Form of
Servicing Agreement with Respect to the Advisor Shares Class
of the Value and Restructuring, Large Cap Growth, Blended
Equity and Intermediate-Term Managed Income Funds (8).
(16) Revised Appendix A to the Shareholder Servicing
Agreement (adding the Technology Fund) (9).
(17) Credit Agreement dated December 27, 1999 by and among
Registrant, Excelsior Tax-Exempt Funds, Inc., Excelsior
Institutional Trust, The Chase Manhattan Bank and the other
lenders thereunder (8).
(18) Form of Waiver and Reimbursement Agreement among
Registrant, United States Trust Company of New York and U.S.
Trust Company (12).
(i) Opinion of counsel (9).
(j) (1) Consent of Counsel (12).
-7-
<PAGE>
(k) None.
(l) (1) Purchase Agreement between Registrant and Shearson
Lehman Brothers Inc. dated February 6, 1985 (4).
(2) Purchase Agreement between Registrant and UST
Distributors, Inc. dated December 29, 1992 (4).
(3) Purchase Agreement between Registrant and Edgewood
Services, Inc. dated November 17, 1995 (1).
(4) Purchase Agreement between Registrant and Edgewood
Services, Inc. dated September 25, 1997 (3).
(5) Purchase Agreement between Registrant and Edgewood
Services, Inc. dated December 30, 1997 (4).
(6) Form of Purchase Agreement between Registrant and
Edgewood Services, Inc. (Advisor Shares) (8).
(7) Form of Purchase Agreement between Registrant and
Edgewood Services, Inc. (Technology Fund) (9).
(m) Distribution Plan and Related Form of Distribution Agreement
relating to Advisor Shares of the Value and Restructuring,
Blended Equity, Large Cap Growth and Intermediate-Term
Managed Income Funds (8).
(n) Amended and Restated Plan Pursuant to Rule 18f-3 for
Operation of a Multi-Class System (12).
(p) (1) Code of Ethics of Registrant (12).
(2) Code of Ethics of U.S. Trust Corporation (including U.S.
Trust Company and United States Trust Company of New York)
(12).
(3) Code of Ethics of Edgewood Services, Inc. (12).
Notes:
- -----
(1) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 23 to its Registration Statement on Form N-1A filed July 31, 1996.
(2) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 29 to its Registration Statement on Form N-1A filed July 31, 1997.
-8-
<PAGE>
(3) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 30 to its Registration Statement on Form N-1A filed October 8, 1997.
(4) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 31 to its Registration Statement on Form N-1A filed March 13, 1998.
(5) Incorporated herein by reference to Registrant's Registration Statement on
Form N-14 filed April 5, 1999.
(6) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 33 to its Registration Statement on Form N-1A filed May 28, 1999.
(7) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 34 to its Registration Statement on Form N-1A filed July 29, 1999.
(8) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 35 to its Registration Statement on Form N-1A filed January 4, 2000.
(9) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 36 to its Registration Statement on Form N-1A filed February 8, 2000.
(10) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 37 to its Registration Statement on Form N-1A filed March 29,
2000.
(11) Incorporated herein by reference to Registrant's Definitive Proxy Statement
pursuant to Section 14 (a) of the Securities and Exchange Act of 1934 filed
March 22, 2000.
(12) Filed herewith.
Item 24. Persons Controlled By or Under
Common Control with Registrant
------------------------------
Registrant is controlled by its Board of Directors.
Item 25. Indemnification
---------------
Article VII, Section 3 of Registrant's Articles of Incorporation,
incorporated herein by reference to Exhibit (a)(1) hereto, and Article VI,
Section 2 of Registrant's Amended and Restated Bylaws, incorporated herein by
reference to Exhibit (b)(1) hereto, provide for the indemnification of
Registrant's directors and officers. Indemnification of Registrant's principal
underwriter, custodian, transfer agent and co-administrators is provided for,
respectively, in Section 1.11 of the Amended and Restated Distribution Contract
incorporated herein by reference to Exhibit (e) hereto, Section 12 of the
Custody Agreement incorporated herein by reference to Exhibit (g)(1) hereto,
Section 7 of the Amended and Restated Mutual Funds
-9-
<PAGE>
Transfer Agency Agreement incorporated herein by reference to Exhibit (h)(2)
hereto, and Section 6 of the Amended and Restated Administration Agreement
incorporated herein by reference to Exhibit (h)(1) hereto. Registrant has
obtained from a major insurance carrier a directors' and officers' liability
policy covering certain types of errors and omissions. In no event will
Registrant indemnify any of its directors, officers, employees, or agents
against any liability to which such person would otherwise be subject by reason
of his willful misfeasance, bad faith, gross negligence in the performance of
his duties, or by reason of his reckless disregard of the duties involved in the
conduct of his office or arising under his agreement with Registrant. Registrant
will comply with Rule 484 under the Securities Act of 1933 and Release No. 11330
under the Investment Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, 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
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
(a) U.S. Trust Company:
U.S. Trust Company ("U.S. Trust") is a Connecticut state bank
and trust company located in Stamford, Connecticut. Set forth below are the
names and principal businesses of the directors and certain senior executive
officers of U.S. Trust, including those who are engaged in any other business,
profession, vocation or employment of a substantial nature.
-10-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust Name Occupation Business
- ----- ---- ---------- --------
<S> <C> <C> <C>
Director Tucker H. Warner Co-Founder, Consulting Firm
The Nutmeg Financial Partner &
Group, LLC Director
1157 Highland Avenue
West Cheshire, CT 06903
Director Thomas C. Clark Managing Director, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
11 West 54th Street
New York, NY 10019
Director, Maribeth S. Rahe Vice Chairman, Asset Management,
Chairman United States Trust United States Trust Investment and
of Board Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
Director Frederick B. Taylor Vice Chairman, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
Director Robert C. Bodine Chairman Asset Management,
U.S. Trust Company Investment and
100 West Lancaster Avenue Fiduciary Services
Suite 200
Wayne, PA 19087
Director Howard E.N. Wilson Chairman Asset Management,
U.S. Trust Company Investment and
100 West Lancaster Avenue Fiduciary Services
Suite 200
Wayne, PA 19087
Director Kenneth G. Walsh Executive Vice Asset Management,
United States Trust President, Investment and
Company of New York United States Fiduciary Services
114 West 47th Street Trust Company of
New York, NY 10036 New York
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust Name Occupation Business
- ----- ---- ---------- --------
<S> <C> <C> <C>
Director, William V. Ferdinand Managing Director Asset Management,
Managing U.S. Trust Company & CIO Fiduciary Services
Director & 225 High Ridge Road & Private Banking
CIO, CT Stamford, CT 06905
Offices
Director, W. Michael Funck President & CEO Asset Management,
President & U.S. Trust Company Fiduciary Services
CEO, CT 225 High Ridge Road & Private Banking
Offices Stamford, CT 06905
</TABLE>
-12-
<PAGE>
(b) United States Trust Company of New York:
United States Trust Company of New York ("U.S. Trust NY") is a full-
service state-chartered bank located in New York, New York. Set forth below are
the names and principal businesses of the trustees and certain senior executive
officers of U.S. Trust NY, including those who are engaged in any other
business, profession, vocation, or employment of a substantial nature.
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Eleanor Baum Dean of School Academic
4 Arleigh Road of Engineering,
Great Neck, NY 11021 The Cooper Union for
the Advancement of
Science & Art
Director Samuel C. Butler Partner in Cravath, Law Firm
Cravath, Swaine Swaine & Moore
& Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Director Peter O. Crisp Retired Chairman of Venture
103 Horseshoe Road Venrock, Inc. Capital
Mill Neck, NY 11765
Director Antonia M. Grumbach Partner in Patterson, Law Firm
Patterson, Belknap, Belknap, Webb
Webb & Tyler, LLP & Tyler
1133 Avenue of the
Americas
New York, NY 10036
Director, H. Marshall Schwarz Chairman of the Asset Management,
Chairman United States Trust Board & Chief Investment and
of the Board Company of New York Executive Officer of Fiduciary Services
and Chief 114 West 47th Street U.S. Trust Corp. and
Executive New York, NY 10036 U.S. Trust Company of
Officer New York
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Philippe de Montebello Director of the Art Museum
The Metropolitan Museum Metropolitan
of Art Museum of Art
1000 Fifth Avenue
New York, NY 10028-0198
Director John H. Stookey Chairman of Petrochemicals and
Suburban Propane Pts. Suburban Propane Pts. Propane
P.O. Box 455
Sheffield, MA 01257
Director Robert N. Wilson Vice Chairman of Health Care
Johnson & Johnson the Board of Johnson Products
One Johnson & & Johnson
Johnson Plaza
New Brunswick, NJ 08933
Director Peter L. Malkin Chairman of Law Firm
Wien & Malkin LLP Wien & Malkin LLP
Lincoln Building
60 East 42nd Street
New York, NY 10165
Director David A. Olsen Retired Chairman of Risk & Insurance
1120 Park Avenue Johnson & Higgins Services
New York, NY 10128
Director Ruth A. Wooden President and CEO of Not-for-Profit
60 Gramercy Park North National Parenting
Apt. 2M Association
New York, NY 10016
Executive Paul K. Napoli Executive Asset Management,
Vice United States Trust Vice President of Investment and
President Company of New York U.S. Trust Corporation Private Banking
114 West 47th Street and United States Trust Fiduciary Services
New York, NY 10036 Company of New York
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director and Maribeth S. Rahe Vice Chairman Asset Management,
Vice Chair- United States Trust of U.S. Trust Corporation Investment and
man Company of New York and United States Trust Fiduciary Services
114 West 47th Street Company of New York
New York, NY 10036
Director, Frederick B. Taylor Vice Chairman and Asset Management,
Vice Chair- United States Trust Chief Investment Of- Investment and
man and Company of New York ficer of U.S. Trust Fiduciary Services
Chief Invest- 114 West 47th Street Corporation and United
ment Officer New York, NY 10036 States Trust Company
of New York
Director, Jeffrey S. Maurer President and Asset Management,
President, United States Trust Chief Operating Investment and
and Chief Company of New York Officer of U.S. Trust Fiduciary Services
Operating 114 West 47th Street Corporation and United
Officer New York, NY 10036 States Trust Company of
New York
Executive John L. Kirby Executive Asset Management,
Vice United States Trust Vice President and Investment and
President Company of New York Chief Financial Fiduciary Services
and Chief 114 West 47th Street Officer of U.S. Trust
Financial New York, NY 10036 Corporation and United
Officer States Trust Company of
New York
Executive Kenneth G. Walsh Executive Asset Management,
Vice United States Trust Vice President of Investment and
President Company of New York U.S. Trust Corporation Fiduciary Services
114 West 47th Street and United States Trust
New York, NY 10036 Company of New York
Director Philip L. Smith Corporate Director and Consumer Goods
P.O. Box 386 Trustee
Ponte Verde Beach, FL 32004
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Robert E. Denham Partner in Manger, Tolls Law Firm
Manger, Tolls & & Olson LLP
Olson LLP
355 South Grand Avenue
35/th/ Floor
Los Angeles, CA 90071-1560
Director Carl H. Pforzheimer, II Managing Partner Broker-Dealer,
Carl H. Pforzheimer & Co. Investment
650 Madison Avenue Adviser
23/rd/ Floor
New York, NY 10022
Executive John M. Deignan Executive Investment
Vice United States Trust Vice President Management and
President Company of New York Fiduciary Services;
114 West 47th Street Private Banking
New York, NY 10036
</TABLE>
-16-
<PAGE>
Item 27. Principal Underwriter
(a) Edgewood Services, Inc., the Distributor for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: Excelsior Tax-Exempt Funds, Inc., Excelsior Institutional
Trust, FTI Funds, FundManager Portfolios, Great Plains Funds, Old Westbury
Funds, Inc., The Riverfront Funds, Robertsons Stephens Investment Trust, WesMark
Funds and WCT Funds.
<TABLE>
<CAPTION>
(b) Names and Principal Positions and Offices with Offices with
Business Addresses The Distributor Registrant
------------------ --------------- ----------
<S> <C> <C>
Lawrence Caracciolo Director and President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
Arthur L. Cherry Director, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
J. Christopher Donahue Director, --
5800 Corporate Drive
Pittsburgh, PA 15237-7002 Edgewood Services, Inc.
Ernest L. Linane Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
Christine T. Johnson Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
Denis McAuley, III Treasurer, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
Thomas R. Donahue Director and Executive Vice President --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
Timothy S. Johnson Secretary, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Names and Principal Positions and Offices with Offices with
Business Addresses The Distributor Registrant
------------------ --------------- ----------
<S> <C> <C>
Victor R. Siclari Assistant Secretary, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-7002
</TABLE>
(c) Not Applicable.
Item 28. Location of Accounts and Records
--------------------------------
1. United States Trust Company of New York, 114 W. 47th Street, New
York, NY 10036 (records relating to its functions as investment adviser and
transfer agent).
2. U.S. Trust Company, 225 High Ridge Road, East Building, Stamford,
Connecticut 06905 (records relating to its function as investment adviser and
co-administrator).
3. Edgewood Services, Inc., Clearing Operations, 5800 Corporate
Drive, Pittsburgh, PA 15237-5829 (records relating to its function as
distributor).
4. Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913 (records relating to its function as co-administrator
and sub-transfer agent).
5. Federated Administrative Services, Federated Investors Tower,
Pittsburgh, PA 15222-3799 (records relating to its function as co-
administrator).
6. The Chase Manhattan Bank, 3 Chase MetroTech Center, 8th Floor,
Brooklyn, NY 11245 (records relating to its function as custodian).
7. Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry
Streets, Philadelphia, Pennsylvania 19103-6996 (Registrant's Articles of
Incorporation, Bylaws, and Minute Books).
-18-
<PAGE>
Item 29. Management Services
-------------------
Not Applicable.
Item 30. Undertakings
------------
Not Applicable.
-19-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 (the "1933
Act") and the Investment Company Act of 1940, Excelsior Funds, Inc. has duly
caused this Post-Effective Amendment No. 38 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 26th day of
May, 2000.
EXCELSIOR FUNDS, INC.
Registrant
/s/ Frederick S. Wonham
----------------------------------
Frederick S. Wonham, President and
Treasurer
(Signature and Title)
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 38 to Excelsior Funds, Inc.'s Registration Statement on Form N-1A
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Frederick S. Wonham Chairman of the Board, May 26, 2000
- ----------------------------- President and Treasurer
Frederick S. Wonham
* Joseph H. Dugan Director May 26, 2000
- -----------------------------
Joseph H. Dugan
Director May 26, 2000
- -----------------------------
Donald L. Campbell
* Wolfe J. Frankl Director May 26, 2000
- -----------------------------
Wolfe J. Frankl
* Robert A. Robinson Director May 26, 2000
- -----------------------------
Robert A. Robinson
* Alfred Tannachion Director May 26, 2000
- -----------------------------
Alfred Tannachion
* Jonathan Piel Director May 26, 2000
- -----------------------------
Jonathan Piel
* Rodman L. Drake Director May 26, 2000
- -----------------------------
Rodman L. Drake
*By: /s/ W. Bruce McConnel
-----------------------
W. Bruce McConnel, Attorney-in-Fact
</TABLE>
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and said attorney
shall have full power and authority, to do and perform in the name and on behalf
of the undersigned in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney may
lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Alfred C. Tannachion
------------------------
Alfred C. Tannachion
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Joseph H. Dugan
-------------------
Joseph H. Dugan
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Robert A. Robinson
----------------------
Robert A. Robinson
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Wolfe J. Frankl
-------------------
Wolfe J. Frankl
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
W. Bruce McConnel, III his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in his capacity as director/trustee or officer, or both, to execute
amendments to Excelsior Funds, Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and
Excelsior Institutional Trust's (collectively, the "Companies") respective
Registration Statements on Form N-1A pursuant to the Investment Company Act of
1940, as amended, and the Securities Act of 1933, as amended (the "Acts") and
all instruments necessary or incidental in connection therewith pursuant to said
Acts and any rules, regulations, or requirements of the Securities and Exchange
Commission in respect thereof, and to file the same with the Securities and
Exchange Commission, and said attorney shall have full power and authority, to
do and perform in the name and on behalf of the undersigned in any and all
capacities, every act whatsoever requisite or necessary to be done, as fully and
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney may lawfully do or cause to be done by
virtue hereof.
Dated: May 19, 2000 /s/ Frederick S. Wonham
------------------------
Frederick S. Wonham
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Rodman L. Drake
-------------------
Rodman L. Drake
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 19, 2000 /s/ Jonathan Piel
-----------------
Jonathan Piel
<PAGE>
EXCELSIOR FUNDS, INC.
EXHIBIT INDEX
EXHIBIT EXHIBIT NO.
- ------- -----------
(a)(16) Articles Supplementary dated March 7, 2000.
(h)(14) Administrative Services Plan and Related Form of Servicing
Agreement with Respect to the Institutional Shares of the
Government Money Fund.
(h)(18) Form of Waiver and Reimbursement Agreement among Registrant,
United States Trust Company of New York and U.S. Trust Company.
(j)(1) Consent of Drinker Biddle & Reath LLP.
(n) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of
a Multi-Class System.
(p)(1) Code of Ethics of Registrant.
(p)(2) Code of Ethics of U.S. Trust Corporation (including U.S. Trust
Company and United States Trust Company of New York).
(p)(3) Code of Ethics of Edgewood Services, Inc.
<PAGE>
Exhibit (a)(16)
EXCELSIOR FUNDS, INC.
ARTICLES SUPPLEMENTARY
Excelsior Funds, Inc., a Maryland corporation having its principal office
in the City of Baltimore, Maryland (hereinafter called the "Company"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to Section 2-208 of the Maryland General Corporation Law,
the Board of Directors of the Company (the "Board") has classified Five Hundred
Million (500,000,000) shares of the Company's authorized but unissued and
unclassified shares of capital stock, of the par value of One Mill ($.001) per
share, as Class X Common Stock, of the par value of One Mill ($.001) per share,
pursuant to the following resolutions adopted at a regular meeting of the Board
held on February 18, 2000:
RESOLVED, that pursuant to the authority expressly given to the Board
in Article VI of the Company's Charter, the Board hereby classifies Five
Hundred Million (500,000,000) of the Company's authorized but unissued and
unclassified shares as Class X Common Stock (with an aggregate par value of
Five Hundred Thousand Dollars ($500,000)); and
FURTHER RESOLVED, that each share of Class X Common Stock shall have
all the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as set forth in the Company's Charter.
SECOND: The shares of capital stock of the Company classified pursuant to
the resolutions set forth herein have been classified by the Board under the
authority contained in the Charter of the Company.
THIRD: These Articles Supplementary do not increase the total number of
shares that the Company is authorized to issue or the aggregate par value
thereof. The total number of shares of capital stock which the Company is
presently authorized to issue remains Thirty-Five Billion (35,000,000,000)
shares of capital stock of the par value of One Mill ($0.001) per share and of
the aggregate par value of Thirty-Five Million Dollars ($35,000,000), classified
or remaining unclassified as follows:
Class A Common Stock: Two Billion (2,000,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Two Million Dollars ($2,000,000);
Class A Common Stock -- Special Series 1: One Billion (1,000,000,000)
----------------------------------------
shares of capital stock of the Company of the par value of One Mill
($0.001) per share and of the aggregate par value of One Million Dollars
($1,000,000);
<PAGE>
Class B Common Stock: Two Billion (2,000,000,000) shares of capital stock
--------------------
of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Two Million Dollars ($2,000,000);
Class B Common Stock -- Special Series 1: One Billion (1,000,000,000)
----------------------------------------
shares of capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of One Million Dollars ($1,000,000);
Class C Common Stock: Seven Hundred Fifty Million (750,000,000) shares of
--------------------
capital stock of the Company of the par value of One Mill ($0.001) per share and
of the aggregate par value of Seven Hundred Fifty Thousand Dollars ($750,000);
Class C Common Stock -- Special Series 1: One Billion (1,000,000,000)
----------------------------------------
shares of capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of One Million Dollars ($1,000,000);
Class C Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class D Common Stock: Three Hundred Seventy Five Million (375,000,000)
--------------------
shares of capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Three Hundred Seventy Five Thousand
Dollars ($375,000);
Class D Common Stock -- Special Series 1: Three Hundred Seventy Five
----------------------------------------
Million (375,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Three Hundred
Seventy Five Thousand Dollars ($375,000);
Class F Common Stock: Three Hundred Seventy Five Million (375,000,000)
--------------------
shares of capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Three Hundred Seventy Five Thousand
Dollars ($375,000);
Class F Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class G Common Stock: Two Billion (2,000,000,000) shares of capital stock
--------------------
of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Two Million Dollars ($2,000,000);
Class G Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share
-2-
<PAGE>
and of the aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class H Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class H Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class I Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class I Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class J Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class J Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class K Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class K Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class L Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class L Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class M Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
-3-
<PAGE>
Class M Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class N Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class N Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class N Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class O Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class O Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class P Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class P Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class Q Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class Q Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class R Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class R Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share
-4-
<PAGE>
and of the aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class S Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class S Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class T Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class T Common Stock -- Special Series 1: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class T Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class U Common Stock : Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class U Common Stock -- Special Series 2: Five Hundred Million
----------------------------------------
(500,000,000) shares of capital stock of the Company of the par value of One
Mill ($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);
Class V Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000);
Class W Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Five Hundred Thousand Dollars ($500,000); and
Class X Common Stock: Five Hundred Million (500,000,000) shares of capital
--------------------
stock of the Company of the par value of One Mill ($0.001) per share and of the
aggregate par value of Five Hundred Thousand Dollars ($500,000).
The total number of authorized and unclassified shares of capital stock of
the Company remaining after the actions described above is Six Billion One
Hundred Twenty-Five Million (6,125,000,000) shares of capital stock of the par
value of One Mill ($0.001) per share and of the aggregate par value of Six
Million One Hundred Twenty-Five Thousand Dollars ($6,125,000).
-5-
<PAGE>
CERTIFICATE
THE UNDERSIGNED, President of EXCELSIOR FUNDS, INC., who executed on behalf
of said Corporation the attached Articles Supplementary of said Corporation, of
which this Certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the attached Articles Supplementary to be the
corporate act of said Corporation, and certifies that to the best of his
knowledge, information and belief the matters and facts set forth in the
attached Articles Supplementary with respect to authorization and approval are
true in all material respects under the penalties for perjury.
/s/ Frederick S. Wonham
------------------------
Frederick S. Wonham, President
Dated as of: March 7, 2000
<PAGE>
IN WITNESS WHEREOF, Excelsior Funds, Inc. has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Assistant Secretary as of March 7, 2000.
EXCELSIOR FUNDS, INC.
By: /s/ Frederick S. Wonham
-----------------------
Frederick S. Wonham, President
WITNESS:
/s/ Michael P. Malloy
- ---------------------
Michael P. Malloy
Assistant Secretary
-6-
<PAGE>
EXHIBIT (h)(14)
EXCELSIOR FUNDS, INC.
---------------------
ADMINISTRATIVE SERVICES PLAN
Section 1. Upon the recommendation of Chase Global Funds Services
---------
Company, Federated Administrative Services or U.S. Trust Company of Connecticut
(each a "Co-Administrator") as Co-Administrator of Excelsior Funds, Inc. (the
"Company"), any officer of the Company (or any other person authorized by the
Company's Board) is authorized to execute and deliver, in the name and on behalf
of the Company, written agreements in substantially the form attached hereto or
in any other form duly approved by the Board of Directors ("Servicing
Agreements") with institutions that are shareholders of record or that have
clients that are shareholders of record or beneficial owners of the Government
Money Fund (the "Fund") of the Company, including without limitation the
Company's service providers and their affiliates ("Service Organizations"). Such
Servicing Agreements shall require the Service Organizations to provide or
arrange for the provision of support services as set forth therein to their
clients who beneficially own Institutional Shares of the Fund offered by the
Company in consideration of a fee, computed and paid in the manner set forth in
the Servicing Agreements, at the annual rate of up to .15% of the applicable net
asset value of Institutional Shares beneficially owned by such clients. Among
other institutions, any bank, trust company, thrift institution or broker-dealer
is eligible to become a Service Organization and to receive fees under this
Plan. All expenses incurred by the Company with respect to Institutional Shares
of the Fund in connection with Servicing Agreements and the implementation of
this Plan shall be borne entirely by the holders of that class or series.
Section 2. The Co-Administrators shall monitor the arrangements
---------
pertaining to the Company's Servicing Agreements with Service Organizations in
accordance with the terms of the Co-Administration Agreement by and among the
Co-Administrators and the Company. The Co-Administrators shall not, however, be
obliged by this Plan to recommend, and the Company shall not be obliged to
execute, any Servicing Agreement with any qualifying Service Organization.
Section 3. So long as this Plan is in effect, the Co-Administrators
---------
shall provide to the Company's Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts expended pursuant to
this Plan and the purposes for which such expenditures were made.
Section 4. This Plan shall become effective immediately upon the
---------
approval of the Plan (and the form of Servicing Agreement attached hereto) by a
majority of the Board of Directors, including a majority of the Directors who
are not "interested persons" as defined in the Investment Company Act of 1940
(the "Act") of the Company and have no direct or indirect financial interest in
the operation of this Plan or in any Servicing Agreement or other agreements
<PAGE>
related to this Plan (the "Disinterested Directors"), pursuant to a vote cast in
person at a meeting called for the purpose of voting on the approval of this
Plan (or form of Servicing Agreement).
Section 5. Unless sooner terminated, this Plan shall continue until
---------
July 31, 2000 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually in the manner
set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of
---------
Directors, provided that any material amendments of the terms of this Plan shall
become effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority
---------
of the Disinterested Directors.
Section 8. While this Plan is in effect, the selection and nomination
---------
of the new Directors of the Company who are not "interested persons" (as defined
in the Act) of the Company shall be committed to the discretion of the existing
Disinterested Directors.
Section 9. The Company initially adopted this Plan as of July 30,
---------
1999.
-2-
<PAGE>
EXHIBIT (h)(14)
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, by and between Excelsior Funds, Inc. (the
"Corporation") and the shareholder service organization (the "Organization")
listed on the signature page hereof;
WITNESSETH:
WHEREAS, certain transactions in Shares of Common Stock, $.001 par
value, of the Corporation or of any series now existing or later created of the
Corporations ("Shares") may be made by investors who are customers of, and using
the services of or arranged by, an Organization, including without limitation
the Company's service providers and their affiliates, that has entered into a
shareholder servicing agreement with the Corporation; and
WHEREAS, the Organization wishes to make it possible for its customers
(the "Customers") to purchase Shares and wishes to act as the Customers' agent
in performing or arranging for the performance of certain administrative
functions in connection with purchases, exchanges and redemptions of Shares from
time to time upon the order and for the account of Customers and to provide
related services to its Customers in connection with their investments in the
Corporation; and
WHEREAS, it is in the interest of the Corporation to make the services
of the Organization available to Customers who are or may become beneficial
owners of Shares of the Corporation;
NOW, THEREFORE, the Corporation and the Organization hereby agree as
follows:
1. Appointment. The Organization, as an independent contractor, hereby
-----------
agrees to perform or to have performed certain services for Customers as
hereinafter set forth. The Organization's appointment hereunder is non-
exclusive, and the parties recognize and agree that, from time to time, the
Corporation may enter into other shareholder servicing agreements, with others
without the Organization's consent. For the purposes of this Agreement, the
Organization is deemed an independent contractor and will have no authority to
act as the Corporation's agent in any respect.
<PAGE>
2. Service to be Performed.
-----------------------
2.1 Type of Service. The Organization shall be responsible for performing
---------------
or having performed shareholder account administrative and servicing functions,
which shall include without limitation/1/: (a) assisting Customers in
designating and changing dividend options, account designations and addresses;
(b) providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records, as may reasonably be requested from
time to time by the Corporation; (c) assisting in processing purchases, exchange
and redemption transactions; (d) arranging for the wiring of funds; (e)
transmitting and receiving funds in connection with Customer orders to purchase,
exchange or redeem Shares; (f) verifying and guaranteeing Customer signatures in
connection with redemption orders, transfers among and changes in Customer-
designated accounts; (g) providing periodic statements showing a Customer's
account balances and, to the extent practicable, integration of such information
with information concerning other client transactions otherwise effected with or
through the Organization; (h) furnishing on behalf of the Corporation's
distributor (either separately or on an integrated basis with other reports sent
to a Customer by the Organization) periodic statements and confirmations of all
purchases, exchanges and redemptions of Shares in a Customer's account required
by applicable federal or state law, all such confirmations and statements to
conform to Rule 10b-10 under the Securities Exchange Act of 1934 and other
applicable federal or state law; (i) transmitting proxy statements, annual
reports, updating prospectuses and other communications from the Corporation to
Customers; (j) receiving, tabulating and transmitting to the Corporation proxies
executed by Customers with respect to annual and special meetings of
shareholders of the Corporation; (k) providing reports (at least monthly, but
more frequently if so requested by the Corporation's distributor) containing
state-by-state listings of the principal residences of the beneficial owners of
the Shares; and (l) providing or arranging for the provision of such other
related services as the Corporation or a Customer may reasonably request. The
Organization shall provide or arrange for all personnel and facilities to
perform the functions described in this paragraph with respect to its Customers.
2.2 Standard of Services. All services to be rendered or arranged for by
--------------------
the Organization hereunder shall be performed in a professional, competent and
timely manner. The details of the operating standards and procedures to be
followed in performance of the services described above shall be determined from
time to time by agreement between the Organization and the Corporation. The
Corporation acknowledges that the Organization's ability to perform on a timely
basis certain of its obligations under this Agreement depends upon the
Corporation's timely delivery of certain materials and/or information to the
Organization. The Corporation agrees to use its best efforts to provide such
materials to the Organization in a timely manner.
_________________
1. Services may be modified or omitted in a particular case and items
relettered or renumbered.
-2-
<PAGE>
3. Fees.
----
3.1 Fees from the Corporation. In consideration for the services described
-------------------------
in Section 2 hereof and the incurring of expenses in connection therewith, the
Organization shall receive fees set forth in Appendix A hereto, such fees to be
paid in arrears periodically (but in no event less frequently than semi-
annually) at annual rates of up to .40% of the average daily net assets of the
Corporation's Shares owned during the period for which payment has been made by
Customers for whom the Organization is the holder or agent of record or with
whom it maintains a servicing relationship. For purposes of determining the fees
payable to the Organization hereunder, the value of the Corporation's net assets
shall be computed in the manner specified in the Corporation's then-current
prospectus for computation of the net asset value of the Corporation's Shares.
The above fees constitute all fees to be paid to the Organization by the
Corporation with respect to the transactions contemplated hereby. The
Corporation may at any time in its discretion suspend or withdraw the sale of
its Shares.
3.2 Fees from Customers. It is agreed that the Organization may impose
-------------------
certain conditions on Customers, in addition to or different from those imposed
by the Corporation, such as requiring a minimum initial investment or charging
Customers direct fees for the same or similar services as are provided hereunder
by the Organization (which fees may either relate specifically to the
Organization's services with respect to the Corporation or generally cover
services not limited to those with respect to the Corporation). The Organization
shall bill Customers directly for such fees. In the event the Organization
charges Customers such fees, it shall notify the Corporation in advance and make
appropriate prior written disclosure (such disclosure to be in accordance with
all applicable laws) to Customers of any such fees charged to the Customer. To
the extent required by applicable rules and regulations of the Securities and
Exchange Commission, the Corporation shall make written disclosure of the fees
paid or to be paid to the Organization pursuant to Section 3.1 of this
Agreement. It is understood, however, that in no event shall the Organization
have recourse or access to the account of any shareholder of the Corporation
except to the extent expressly authorized by law or by such shareholder, or to
any assets of the Corporation, for payment of any direct fees referred to in
this Section 3.2.
4. Information Pertaining to the Shares. The Organization and its
------------------------------------
officers, employees and agents are not authorized to make any representations
concerning the Corporation or the Shares to Customers or prospective Customers,
excepting only accurate communication of any information provided by or on
behalf of any administrator or distributor of the Corporation or any factual
information contained in the then-current prospectus relating to the Corporation
or to any series of the Corporation. In furnishing such information regarding
the Corporation or the Shares, the Organization shall act as agent for the
Customer only and shall have no authority to act as agent for the Corporation.
Advance copies or proofs of all materials which are generally circulated or
disseminated by the Organization to Customers or prospective Customers which
identify or describe the Corporation shall be provided to the Corporation at
least 10 days prior to such circulation or dissemination (unless the Corporation
consents in writing to a shorter period), and such materials shall not be
circulated or disseminated or further circulated or disseminated at any time
after the Corporation shall have given written notice within such 10 day period
to the Organization of any objection thereto.
-3-
<PAGE>
Nothing in this Section 4 shall be construed to make the Corporation
liable for the use (or accuracy unless prepared by the Corporation for the
specific use) of any information about the Corporation which is disseminated by
the Organization.
5. Use of the Organization's Name. The Corporation shall not use the name
------------------------------
of the Organization (or any of its affiliates or subsidiaries) in any
prospectus, sales literature or other material relating to the Corporation in a
manner not approved by the Organization prior thereto in writing; provided,
however, that the approval of the Organization shall not be required for any use
of its name which merely refers in accurate and factual terms to its appointment
hereunder and the terms hereof or which is required by law, including without
limitation, by the Securities and Exchange Commission or any state securities
authority or any other appropriate regulatory, governmental or judicial
authority; provided, further, that in no event shall such approval be
unreasonably withheld or delayed.
6. Use of the Corporation's Name. The Organization shall not use the name
-----------------------------
of the Corporation on any checks, bank drafts, bank statements or forms for
other than internal use in a manner not approved by the Corporation prior
thereto in writing; provided, however, that the approval of the Corporation
shall not be required for the use of the Corporation's name in connection with
communications permitted by Section 4 hereof or (subject to Section 4, to the
extent the same may be applicable) for any use of the Corporation's name which
merely refers in accurate and factual terms to the Corporation in connection
with the Organization's role hereunder or which is required by law, including
without limitations, by the Securities and Exchange Commission or any state
securities authority or any other appropriate regulatory, governmental or
judicial authority; provided, further, that in no event shall such approval be
unreasonably withheld or delayed.
7. Security. The Organization represents and warrants that to the best of
--------
its knowledge, the various procedures and systems which it has implemented
(including provision for twenty-four hours a day restricted access) with regard
to safeguarding from loss or damage attributable to fire, theft or any other
cause the Corporation's records and other data and the Organization's records,
data, equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as in its judgment are required for the secure performance of
its obligations hereunder. The parties shall review such systems and procedures
on a periodic basis, and the Corporation shall from time to time specify the
types of records and other data of the Corporation to be safeguarded in
accordance with this Section 7.
8. Compliance with Laws. The Organization shall comply with all
--------------------
applicable federal and state laws and regulations, including without limitation
securities laws. The Organization represents and warrants to the Corporation
that the performance of all its obligations hereunder will comply with all
applicable laws and regulations, the provisions of its charter documents and by-
laws and all material contractual obligations binding upon the Organization. The
Organization furthermore undertakes that it will promptly, after the
Organization becomes so aware, inform the Corporation of any change in
applicable laws or regulations (or interpretations thereof) or in its charter or
by-laws or material contracts which would prevent or impair full performance of
any of its obligations hereunder.
-4-
<PAGE>
9. Reports. Quarterly, and more frequently to the extent requested by
-------
the Corporation from time to time, the Organization agrees that it will provide
the administrator of the Corporation with a written report of the amounts
expended by the Organization pursuant to this Agreement and the purposes for
which such expenditures were made. Such written reports shall be in a form
satisfactory to the Corporation and shall supply all information necessary for
the Corporation to discharge its responsibilities under applicable laws and
regulations.
10. Record Keeping.
--------------
10.1 Section 31. The Organization shall maintain records in a form
----------
reasonably acceptable to the Corporation and in compliance with applicable laws
and the rules and regulations of the Securities and Exchange Commission,
including but not limited to the record-keeping requirements of Section 31 of
the Investment Company Act of 1940, as amended (the "1940 Act") and the rules
thereunder. Such records shall be deemed to be the property of the Corporation
and will be made available at the Corporation's request for inspection and use
by the Corporation, representatives of the Corporation and governmental
authorities. The Organization agrees that, for so long as it retains any records
of the Corporation, it will meet all reporting requirements pursuant to the 1940
Act and applicable to the Organization with respect to such records. Upon
termination of this Agreement, the Organization shall deliver to the
administrator of the Corporation all books and records maintained by the
Organization and deemed to be the Corporation's property hereunder.
10.2 Rules 17a-3 and 17a-4. The Organization shall maintain accurate and
---------------------
complete records with respect to services performed by the Organization in
connection with the purchase and redemption of Shares. Such records shall be
maintained in form reasonably acceptable to the Corporation and in compliance
with the requirements of all applicable laws, rules and regulations, including
without limitation, Rules 17a-3 and 17a-4 under the Securities Exchange Act of
1934, as amended, pursuant to which any dealer of the Shares must maintain
certain records. All such records maintained by the Organization shall be the
property of such dealer and will be made available for inspection and use by the
Corporation or such dealer upon the request of either. The Organization shall
file with the Securities and Exchange Commission and other appropriate
governmental authorities, and furnish to the Corporation and any such dealer
copies of, all reports and undertakings as may be reasonably requested by the
Corporation or such dealer in order to comply with the said rules. If so
requested by any such dealer, the Organization shall confirm to such dealer its
obligations under this Section 10.2 by a writing reasonably satisfactory to such
dealer.
10.3 Transfer of Customer Data. In the event this Agreement is terminated
-------------------------
or a successor to the Organization is appointed, the Organization shall transfer
to such designee as the Corporation may direct a certified list of the
shareholders of the Corporation serviced by the Organization (with name, address
and tax identification or Social Security number, if any), a complete record of
the account of each such shareholder and the status thereof, and all other
relevant books, records, correspondence, and other data established or
maintained by the Organization under this Agreement. In the event this Agreement
is terminated, the Organization
-5-
<PAGE>
will use its best efforts to cooperate in the orderly transfer of such duties
and responsibilities, including assistance in the establishment of books,
records and other data by the successor.
10.4 Survival of Record-Keeping Obligations. The record-keeping
--------------------------------------
obligations imposed in this Section 10 shall survive the termination of this
Agreement for a period of three years.
10.5 Obligations Pursuant to Agreement Only. Nothing in this Section 10
--------------------------------------
shall be construed so that the Organization would, by virtue of its role
hereunder, be required under applicable law to maintain the records required to
be maintained by it under this Section 10, but is understood that the
Organization has agreed to do so in order to enable the Corporation and its
dealer or dealers to comply with laws and regulations applicable to them.
10.6 Organization's Rights to Copy Records. Anything in this Section 10 to
-------------------------------------
the contrary notwithstanding, except to the extent otherwise prohibited by law,
the Organization shall have the right to copy, maintain and use any records
maintained by the Organization pursuant to this Section 10, except as otherwise
prohibited by Sections 4 and 6 hereof.
11. Force Majeure. The Organization shall not be liable or responsible
-------------
for delays or errors by reason of circumstances beyond its reasonable control,
including, but not limited to, acts of civil or military authority, national
emergencies, labor difficulties, fire, mechanical breakdown, flood or
catastrophe, Acts of God, insurrection, war, riots or failure of communication
or power supply.
12. Indemnification.
---------------
12.1 Indemnification of the Organization. The Corporation will indemnify
-----------------------------------
and hold the Organization harmless from all losses, claims, damages, liabilities
or expenses (including reasonable counsel fees and expenses) from any claim,
demand, action or suit (collectively, "Claims") arising in connection with
material misstatements or omissions in the Corporation's Prospectus.
Notwithstanding anything herein to the contrary, the Corporation will indemnify
and hold the Organization harmless from any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses)
resulting from any Claim as a result of its acting in accordance with any
written instructions reasonably believed by the Organization to have been
executed by any person duly authorized by the Corporation, or as a result of
acting in reliance upon any instrument or stock certificate reasonably believed
by the Organization to have been genuine and signed, countersigned or executed
by a person duly authorized by the Corporation, excepting only the negligence or
bad faith of the Organization.
In any case in which the Corporation may be asked to indemnify or
hold the Organization harmless, the Corporation shall be advised of all
pertinent facts concerning the situation in question and the Organization shall
use reasonable care to identify and notify the Corporation promptly concerning
any situation which presents or appears likely to present a claim for
indemnification against the Corporation. The Corporation shall have the option
to defend the Organization against any Claim which may be the subject of
indemnification hereunder. In the event that the Corporation elects to defend
against such Claim, the defense
-6-
<PAGE>
shall be conducted by counsel chosen by the Corporation and satisfactory to the
Organization. The Organization may retain additional counsel at its expense.
Except with the prior written consent of the Corporation, the Organization shall
not confess any Claim or make any compromise in any case in which the
Corporation will be asked to indemnify the Organization.
12.2 Indemnification of the Corporation. Without limiting the rights of
----------------------------------
the Corporation under applicable law, the Organization will indemnify and hold
the Corporation harmless from all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) from any Claim (a)
arising from (i) the bad faith or negligence of the Organization, its officers,
employees or agents, (ii) any breach of applicable law by the Organization, its
officers, employees or agents, (iii) any action of the Organization, its
officers, employees or agents which exceeds the legal authority of the
Organization or its authority hereunder, or (iv) any actions, inactions, errors
or omissions of the Organization, its officers, employees or agents with respect
to the purchase, redemption, transfer and registration of Customers' Shares or
the Corporation's verification or guarantee of any Customer signature.
In any case in which the Organization may be asked to indemnify or
hold the Corporation harmless, the Organization shall be advised of all
pertinent facts concerning the situation in question and the Corporation shall
use reasonable care to identify and notify the Organization promptly concerning
any situation which presents or appears likely to present a claim for
indemnification against the Organization. The Organization shall have the option
to defend the Corporation against any Claim which may be the subject of
indemnification hereunder. In the event that the Organization elects to defend
against such Claim, the defense shall be conducted by counsel chosen by the
Organization and satisfactory to the Corporation. The Corporation may retain
additional counsel at its expense. Except with the prior written consent of the
Organization, the Corporation shall not confess any Claim or make any compromise
in any case in which the Organization will be asked to indemnify the
Corporation.
12.3 Survival of Indemnities. The indemnities granted by the parties in
-----------------------
this Section 12 shall survive the termination of this Agreement.
13. Notices. All notices or other communications hereunder to either
-------
party shall be in writing and shall be deemed sufficient if mailed to such party
at the address of such party set forth on the signature page of this Agreement
or at such other address as such party may have designated by written notice to
the other.
14. Further Assurances. Each party agrees to perform such further acts
------------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
15. Termination. Unless sooner terminated, this Agreement will continue
-----------
until July 31, 1996 and thereafter will continue automatically for successive
annual periods provided such continuance is specifically approved at least
annually by vote of a majority of (i) the Board of Directors of the Corporation
and (ii) those Directors who are not "interested persons" (as defined in the
1940 Act) of the Corporation and have no direct or indirect financial interest
in the operation of the Corporation's Administrative Services Plan or in any
agreement related thereto cast in person at a meeting called for the purpose of
voting on such approval ("Disinterested
-7-
<PAGE>
Directors"). This Agreement is terminable, without penalty, at any time by the
Corporation (which termination may be by a vote of a majority of the
Disinterested Directors) or by you upon notice to the Corporation.
16. Changes; Amendments. This Agreement may be changed or amended only by
-------------------
written instrument signed by both parties hereto.
17. Subcontracting By Organization. The Organization may, with the
------------------------------
written approval of the Corporation (such approval not to be unreasonably
withheld), subcontract for the performance of the Organization's obligations
hereunder with any one or more persons, including but not limited to any one or
more persons which is an affiliate of the Organization; provided, however, that
the Organization shall be as fully responsible to the Corporation for the acts
and omissions of any subcontractor as it would be for its own acts or omissions.
18. Compliance with Laws and Policies; Cooperation. The Corporation
----------------------------------------------
hereby agrees that it will comply with all laws and regulations applicable to
its operations and the Organization agrees that it will comply with all laws and
regulations applicable to its operations hereunder. Each party understands that
the other may from time to time adopt or modify policies relating to the subject
matter of this Agreement, in which case the party adopting or modifying such a
policy shall notify the other thereof and the parties shall consider the
applicability thereof and endeavor to comply therewith to the extent not
impracticable or unreasonably burdensome. Each of the parties agrees to
cooperate with the other in connection with the performance of this Agreement
and the resolution of any problems, questions or disagreements in connection
herewith.
18.1 Annual Financial Reports. At least once a year, the Corporation shall
------------------------
send to the record owners of its shares the Corporation's audited financial
statements.
18.2 Annual Certification. At least once a year, the Organization shall
--------------------
certify to the Corporation that it is conducting its business in accordance with
the terms and conditions of the Agreement.
19. Single Portfolio. Notwithstanding anything in this Agreement to the
----------------
contrary, any amount owed by Corporation to the Organization under this
Agreement or otherwise with respect to any matter hereunder shall be paid only
from and shall be limited to the assets and property of the particular
investment portfolio of the Corporation to which the matter relates.
20. Miscellaneous. This Agreement shall be construed and enforced in
-------------
accordance with and governed by the laws of the State of Maryland. The captions
in this Agreement are included for convenience of reference only and in no way
define or limit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument. The terms of this
Agreement shall become effective as of the date set forth below.
-8-
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have caused this Agreement to be executed and delivered in their names
and on their behalf by the undersigned, thereunto duly authorized, all as of the
day and year set forth below.
Dated as of:__________________
Excelsior Funds, Inc. Address for Notices:
_____________________________
_____________________________
_____________________________
By: _________________________ _____________________________
(Authorized Officer)
______________________________ Address for Notices:
[Service Organization] _____________________________
_____________________________
_____________________________
_____________________________
By:___________________________
(Authorized Officer)
-9-
<PAGE>
APPENDIX A
----------
EXCELSIOR FUNDS, INC.
Pursuant to the terms and conditions set forth in the attached
Shareholder Servicing Agreement, the Organization will receive the fees set
forth below in consideration for the services described in Section 2 of said
Agreement and the incurring of expenses in connection therewith, such fees
(calculated pursuant to Section 3.1 of said Agreement) to be paid in arrears
periodically (but in no event less frequently than semi-annually):
=====================================================================
FUND Shareholder
Servicing
Fee
======================================================================
Money Fund __ BP
Government Money Fund __ BP
Treasury Money Fund __ BP
======================================================================
Short-Term Government Securities Fund __ BP
Intermediate-Term Managed Income Fund __ BP
Managed Income Fund __ BP
======================================================================
Blended Equity Fund __ BP
Energy and Natural Resources Fund __ BP
Value and Restructuring Fund __ BP
Small Cap Fund __ BP
Large Cap Growth Fund __ BP
Real Estate Fund __ BP
International Fund __ BP
Latin America Fund __ BP
Pacific/Asia Fund __ BP
Pan European Fund __ BP
Emerging Markets Fund __ BP
======================================================================
-10-
<PAGE>
Exhibit (h)(18)
WAIVER AND REIMBURSEMENT AGREEMENT
Agreement ("Agreement") dated as of the __ day of _________,
________by and among Excelsior Funds, Inc., a Maryland corporation and a
registered investment company under the Investment Company Act of 1940, as
amended ("Excelsior"), and United States Trust Company of New York, a state-
chartered bank and trust company ("United States Trust") and U.S. Trust Company,
a Connecticut state bank and trust company ("U.S. Trust" and together with
United States Trust, the "Advisers").
BACKGROUND
The Advisers serve as investment advisers to each portfolio of
Excelsior pursuant to an Investment Advisory Agreement among the Advisers and
Excelsior dated as of ______________________.
The parties to this Agreement wish to provide for an undertaking by
the Advisers to limit investment advisory or other fees or reimburse expenses of
each of the portfolios of Excelsior in order to improve the performance of each
such portfolio.
AGREEMENT
THEREFORE, in consideration of the foregoing, the parties intending to
be legally bound hereby, agree as follows:
The Advisers shall, from the date of this Agreement until March 31,
2001, waive all or a portion of their investment advisory fees and/or reimburse
expenses in amounts necessary so that after such waivers and/or reimbursements,
the maximum total operating expense ratios of the portfolios of Excelsior shall
not exceed the amounts set forth on Exhibit A hereto.
Each of the Advisers acknowledges and agrees that it shall not be
entitled to collect on or make a claim for waived fees or reimbursed expenses at
any time in the future.
This Agreement shall be governed by and construed under the laws of
the State of New York, without regard to its conflict of law provisions. This
Agreement may be signed in counterparts.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
EXCELSIOR FUNDS, INC. UNITED STATES TRUST COMPANY
OF NEW YORK
By:______________________________ By:_____________________________________
Name: Name:
Title: Title:
U.S. TRUST COMPANY
By:____________________________________
Name:
Title:
-2-
<PAGE>
Exhibit A
Excelsior Funds, Inc.
---------------------
Name of Portfolio Total Annual Operating Expenses
- ----------------- -------------------------------
Blended Equity Fund
International Fund
Money Fund
Government Money Fund
Managed Income Fund
Treasury Money Fund
Energy and Natural Resources Fund
Value and Restructuring Fund
Small Cap Fund
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Latin America Fund
Pacific/Asia Fund
Pan European Fund
Real Estate Fund
Large Cap Growth Fund
Emerging Markets Fund
-3-
<PAGE>
EXHIBIT (j)(1)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our
Firm under the caption "Counsel" in the Statement of Additional Information that
is included in Post-Effective Amendment No. 38 and Amendment No. 40 to the
Registration Statement (Nos. 2-92665; 811-4088) on Form N-1A of Excelsior Funds,
Inc. under the Securities Act of 1933 and the Investment Company Act of 1940,
respectively. This consent does not constitute a consent under Section 7 of the
Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 or the rules and regulations
of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
May 26, 2000
<PAGE>
EXHIBIT n
EXCELSIOR FUNDS, INC.
(the "Company")
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18f-3 FOR OPERATION OF
A MULTI-CLASS SYSTEM
--------------------
I. INTRODUCTION
----------------
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") adopted Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which permits the creation and operation of a multi-
class distribution structure without the need to obtain an exemptive order under
Section 18 of the 1940 Act. Rule 18f-3, which became effective on April 3,
1995, requires an investment company to file with the Commission a written plan
specifying all of the differences among classes, including the various services
offered to shareholders, different distribution arrangements for each class,
methods for allocating expenses relating to those differences and any conversion
features or exchange privileges. On May 19, 1995, the Board of Directors of the
Company initially authorized the Company to operate a multi-class distribution
structure in compliance with Rule 18f-3. This Plan pursuant to Rule 18f-3 is
hereby amended and restated as of March 3, 2000.
II. ATTRIBUTES OF CLASSES
--------------------------
A. Generally
---------
The Company is authorized to offer two classes of shares - Shares and
Institutional Shares - in each of the Money, Government Money, Managed Income,
International Fund, Treasury Money, Small Cap, Energy and Natural Resources,
Latin America, Pacific/Asia, Pan European, and Short-Term Government Securities
Funds; the Company is authorized to offer three classes of shares - Shares,
Institutional Shares and Advisory Shares in each of the Blended Equity, Value
and Restructuring and Intermediate-Term Managed Income Funds; and the Company is
authorized to offer two classes of shares - Shares and Advisory Shares in the
Large Cap Growth Fund (each, a "Fund" and, collectively, the "Funds"). The Real
Estate, Emerging Markets and Technology Funds are authorized to issue one class
of shares - Shares.
In general, shares of each class shall initially be identical except
for different expense variables (which will result in different total returns
for each class), certain related rights and certain shareholder services. More
particularly, the Shares, Institutional Shares and Advisory Shares of a Fund
shall represent interests in the same portfolio of investments of the Fund, and
shall be identical in all respects, except for: (a) the impact of (i) expenses
assessed to a class pursuant to an Administrative Services Plan ("Services
Plan") adopted for that class, and (ii) any other incremental expenses
identified from time to time that should be properly allocated to one class so
long as any changes in expense allocations are reviewed and approved by a vote
of the Board of Directors, including a majority of the non-interested directors;
(b) the fact that
<PAGE>
each class shall vote separately on any matter submitted to shareholders that
pertains to (i) the Services Plan adopted for that class or (ii) any class
expense borne by that class; (c) the exchange privileges of each class of
shares; (d) the designation of each class of shares of the Fund; and (e) any
different shareholder services relating to a class of shares.
B. Shareholder Servicing Arrangements
----------------------------------
1. Shares
Shares of a Fund shall initially be available for purchase directly by
individuals or by institutions. Shares of a Fund shall be offered without a
sales charge.
Shares of a Fund shall initially be subject to a fee payable to United
States Trust Company of New York, U.S. Trust Company, their affiliates and
correspondent banks, and other institutions (collectively, "Shareholder
Organizations") pursuant to the Services Plan adopted for that class which shall
not initially exceed .40% (on an annual basis) of the average daily net asset
value of the Fund's Shares held by customers of such Shareholder Organizations.
Shareholder services provided under the Services Plan adopted for the
class may include: (i) assisting in processing purchase, exchange and redemption
requests; (ii) transmitting and receiving funds in connection with customer
orders to purchase, exchange or redeem shares; and (iii) providing periodic
statements.
2. Institutional Shares
Institutional Shares of a Fund shall initially be available for
purchase directly by institutions. Institutional Shares of a Fund shall be
offered without a sales charge.
Institutional Shares of a Fund shall initially be subject to a fee
payable to Shareholder Organizations pursuant to the Services Plan adopted for
that class which shall not initially exceed .15% (on an annual basis) of the
average daily net asset value of the Fund's Institutional Shares held by
customers of such Shareholder Organizations.
Shareholder services provided under the Services Plan adopted for the
class may include (i) assisting in processing purchase, exchange and redemption
requests; (ii) transmitting and receiving funds in connection with customer
orders to purchase, exchange or redeem shares; and (iii) providing periodic
statements.
3. Advisory Shares
Advisory Shares of a Fund shall initially be available for purchase by
financial intermediaries, such as financial planners and investment advisers, to
participants in employer-sponsored contribution plans and to investors
maintaining certain qualified accounts at financial institutions and certain
other institutional investors. Advisory Shares of a Fund shall be offered
without a sales charge.
-2-
<PAGE>
Advisory Shares of a Fund shall initially be subject to a fee payable
to Shareholder Organizations pursuant to the Services Plan adopted for that
class which shall not initially exceed .25% (on an annual basis) of the average
daily net asset value of the Fund's Advisory Shares held by customers of such
Shareholder Organizations.
Shareholder services provided under the Services Plan adopted for the
class may include (i) assisting in processing purchase, exchange and redemption
requests; (ii) transmitting and receiving funds in connection with customer
orders to purchase, exchange or redeem shares; and (iii) providing periodic
statements.
C. Distribution Arrangements
-------------------------
Advisory Shares of each Fund shall not be subject to a sales charge but
shall be subject to a fee payable pursuant to the Distribution Plan adopted for
that class which shall not initially exceed .25% (on an annual basis) of the
average daily net asset value of the Fund's outstanding Advisory Shares.
Payments under the Distribution Plan will be used to compensate the Company's
distributor for its services which are intended to result in the sale of
Advisory Shares.
D. Shareholder Services
--------------------
1. Exchange Privileges
-------------------
a. Shares
Investors shall initially be permitted to exchange, without an
exchange fee imposed by the Company, their Shares in a Fund for: (i) Shares of
another investment portfolio offered by the Company; (ii) Shares of any
investment portfolio offered by Excelsior Tax-Exempt Funds, Inc.; and (iii)
Shares of any investment portfolio offered by Excelsior Institutional Trust,
provided that such other shares may legally be sold in the state of the
investor's residence.
b. Institutional Shares
Holders of Institutional Shares generally shall initially be permitted
to exchange, without an exchange fee imposed by the Company, their Institutional
Shares in a Fund for Institutional Shares of any investment portfolio offered by
Excelsior Institutional Trust, provided that such other shares may legally be
sold in the state of the investor's residence.
c. Advisory Shares
Holders of Advisory Shares generally shall initially be permitted to
exchange, without an exchange fee imposed by the Company, their Advisory Shares
in a Fund for Shares of the Blended Equity, Large Cap Growth, Value and
Restructuring and Intermediate-Term
-3-
<PAGE>
Managed Income Funds provided that such other shares may legally be sold in the
state of the investor's residence.
2. Retirement Plans
----------------
a. Shares, Institutional Shares and Advisory Shares
The Company generally shall initially make Shares, Institutional
Shares and Advisory Shares available for purchase by investors in connection
with the following tax-deferred prototype retirement plans: (i) IRAs (including
"rollovers" from existing retirement plans) for individuals and their spouses;
(ii) profit-sharing and money-purchase plans for corporations and self-employed
individuals and their partners to benefit themselves and their employees; and
(iii) Keogh plans for self-employed individuals.
3. Automatic Investment Program
----------------------------
a. Shares
The Company shall initially offer an automatic investment program
whereby, in general, an investor may arrange to have Shares purchased
automatically by authorizing the Company's transfer agent to withdraw funds from
the investor's bank account.
4. Systematic Withdrawal Plan
--------------------------
a. Shares
The Company shall initially offer a systematic withdrawal plan
whereby, in general, an investor may arrange to have Shares redeemed
automatically.
E. Methodology for Allocating Expenses Between Classes
---------------------------------------------------
Class-specific expenses of a Fund shall be allocated to the specific
class of shares of the Fund. Non-class-specific expenses of a Fund shall be
allocated in accordance with paragraph (c) of Rule 18f-3.
-4-
<PAGE>
Exhibit (p)(1)
EXCELSIOR FUNDS, INC.
(the "Company")
CODE OF ETHICS
--------------
I. Legal Requirement.
-----------------
Rule 17j-1(b) under the Investment Company Act of 1940, as amended (the
"1940 Act"), makes it unlawful for any officer or director of the Company in
connection with the purchase or sale by such person of a security "held or to be
acquired" by the Company:
1. To employ any device, scheme or artifice to defraud the Company;
2. To make to the Company any untrue statement of a material fact or
omit to state to the Company a material fact necessary in order
to make the statements made, in light of the circumstances under
which they are made, not misleading;
3. To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon the Company;
or
4. To engage in any manipulative practice with respect to the
Company's investment portfolios.
II. Purpose of the Code of Ethics.
-----------------------------
The Company expects that its officers and directors will conduct their
personal investment activities in accordance with (1) the duty at all times to
place the interests of the Company's shareholders first, (2) the requirement
that all personal securities transactions be conducted consistent with this Code
of Ethics and in such a manner as to avoid any actual or potential conflict of
interest or any abuse of an individual's position of trust and responsibility,
and (3) the fundamental standard that investment company personnel should not
take inappropriate advantage of their positions.
In view of the foregoing, the provisions of Section 17(j) of the 1940 Act,
the Securities and Exchange Commission's 1940 Act Release No. 23958 "Personal
Investment Activities of Investment Company Personnel" (August 24, 1999), the
"Report of the Advisory Group on Personal Investing" issued by the Investment
Company Institute on May 9, 1994 and the Securities and Exchange Commission's
September 1994 Report on "Personal Investment Activities of Investment Company
Personnel," the Company has determined to adopt this Code of Ethics on behalf of
the Company to specify a code of conduct for certain types of personal
securities transactions which might involve conflicts of interest or an
appearance of impropriety, and to establish reporting requirements and
enforcement procedures.
<PAGE>
III. Definitions.
-----------
A. An "Access Person" means: (1) each director or officer of the Company;
(2) each employee (if any) of the Company (or of any company in a
control relationship to the Company) who, in connection with his or
her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by the
Company or whose functions relate to the making of any recommendations
with respect to such purchases or sales; and (3) any natural person in
a control relationship to the Company who obtains information
concerning recommendations made to the Company with regard to the
purchase or sale of a security.
For purposes of this Code of Ethics, an "Access Person" does not
include any person who is subject to the securities transaction pre-
clearance requirements and securities transaction reporting
requirements of the Codes of Ethics adopted by the Company's
investment adviser or principal underwriter in compliance with Rule
17j-1 of the 1940 Act and Rule 204-2(a)(12) of the Investment Advisers
Act of 1940 or Section 15(f) of the Securities Exchange Act of 1934,
as applicable.
B. "Restricted Director" or "Restricted Officer" means each director or
officer of the Company who is not also a director, officer, partner,
employee or controlling person of the Company's investment adviser,
sub-adviser, administrator, custodian, transfer agent or distributor.
C. An Access Person's "immediate family" includes a spouse, minor
children and adults living in the same household as the Access Person.
D. A security is "held or to be acquired" if within the most recent 15
days it (1) is or has been held by the Company, or (2) is being or has
been considered by the Company, its investment adviser or sub-adviser
for purchase by the Company. A purchase or sale includes the writing
of an option to purchase or sell and any security that is exchangeable
for, or convertible into, any security that is held or to be acquired
by a Fund.
E. An "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of Sections 13 or 15(d) of the Securities Exchange Act of
1934.
F. "Investment Personnel" of the Company means:
(i) Any employee of the Company (or of any company in a control
relationship to the Company) who, in connection with his or her
regular functions or duties, makes or participates in making
recommendations regarding the purchase or sale of securities by
the Company.
2
<PAGE>
(ii) Any natural person who controls the Company and who obtains
information concerning recommendations made to the Company
regarding the purchase or sale of securities by the Company.
G. A "Limited Offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2)
or Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under
the Securities Act of 1933.
H. "Exempt Security" means:
1. Direct obligations of the Government of the United States;
banker's acceptances; bank certificates of deposit; commercial
paper; high quality short-term debt instruments, including
repurchase agreements; and shares of registered open-end
investment companies.
2. Securities purchased or sold in any account over which the Access
Person has no direct or indirect influence or control.
3. Securities purchased or sold in a transaction which is non-
volitional on the part of either the Access Person or the
Company.
4. Securities acquired as a part of an automatic dividend
reinvestment plan.
5. Securities acquired upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities, to
--- ----
the extent such rights were acquired from such issuer, and sales
of such rights so acquired.
6. Securities which the Company's investment portfolios are not
permitted to purchase under the investment objectives and
policies set forth in the Company's then current prospectus(es)
under the Securities Act of 1933 or the Company's registration
statement on Form N-1A.
IV. Policies of the Company Regarding Personal Securities Transactions.
------------------------------------------------------------------
A. General Policy.
--------------
No Access Person of the Company shall engage in any act, practice or
course of business that would violate the provisions of Rule 17j-1(b)
set forth above, or in connection with any personal investment
activity, engage in conduct inconsistent with this Code of Ethics.
3
<PAGE>
B. Specific Policies.
-----------------
1. Restrictions on Personal Securities Transactions By Access
Persons Other Than Restricted Directors and Restricted Officers.
---------------------------------------------------------------
a. No Access Person who is not a Restricted Director or
Restricted Officer may buy or sell securities other than
Exempt Securities for his or her personal portfolio or the
portfolio of a member of his or her immediate family without
obtaining oral authorization from the Compliance Officer of
the Company's administrator prior to effecting such security
-----
transaction.
A written authorization for such security transaction will
be provided by the administrator's Compliance Officer to the
person receiving the authorization (if granted).
Note: If an Access Person has questions as to
whether purchasing or selling a security for his
or her personal portfolio or the portfolio of a
member of his or her immediate family requires
prior oral authorization, the Access Person should
consult the administrator's Compliance Officer for
clearance or denial of clearance to trade prior to
-----
effecting any securities transactions.
b. Pre-clearance approval under paragraph (a) will expire at
the close of business on the trading day after the date on
which oral authorization is received, and the Access Person
is required to renew clearance for the transaction if the
trade is not completed before the authority expires.
c. No clearance will be given to an Access Person other than a
Restricted Director or Restricted Officer to purchase or
sell any security (1) on a day when any portfolio of the
Company has a pending "buy" or "sell" order in that same
security until that order is executed or withdrawn or (2)
when the Compliance Officer has been advised by the
investment adviser or sub-adviser that the same security is
being considered for purchase or sale for any portfolio of
the Company.
d. The pre-clearance requirement contained in paragraph
IV.B.1.a, above, shall apply to all purchases of a
beneficial interest in any security, through an Initial
Public Offering or a Limited Offering by any Access Person
who is also classified as Investment Personnel. A record of
any decision and the reason supporting
4
<PAGE>
such decision to approve the acquisition by Investment
Personnel of Initial Public Offerings or Limited Offerings
shall be made.
2. Restrictions on Personal Securities Transactions by Restricted
--------------------------------------------------------------
Directors and Restricted Officers.
---------------------------------
The Company recognizes that a Restricted Director and a
Restricted Officer do not have on-going, day-to-day involvement
with the operations of the Company. In addition, it has been the
practice of the Company to give information about securities
purchased or sold by the Company or considered for purchase and
sale by the Company to Restricted Directors and Restricted
Officers in materials circulated more than 15 days after such
securities are purchased or sold by the Company or are considered
for purchase or sale by the Company. Accordingly, the Company
believes that less stringent controls are appropriate for
Restricted Directors and Restricted Officers, as follows:
a. The securities pre-clearance requirement contained in
paragraph IV.B.1.a. above shall only apply to a Restricted
Director or Restricted Officer if he or she knew or, in the
ordinary course of fulfilling his or her official duties as
a director or officer, should have known, that during the
fifteen day period before the transaction in a security
(other than an Exempt Security) or at the time of the
transaction that the security purchased or sold by him or
her other than an Exempt Security was also purchased or sold
by the Company or considered for the purchase or sale by the
Company.
b. If the pre-clearance provisions of the preceding paragraph
apply, no clearance will be given to a Restricted Director
or Restricted Officer to purchase or sell any security (1)
on a day when any portfolio of the Company has a pending
"buy" or "sell" order in that same security until that order
is executed or withdrawn or (2) when the Compliance Officer
has been advised by the investment adviser or sub-adviser
that the same security is being considered for purchase or
sale for any portfolio of the Company.
V. Procedures.
----------
A. In order to provide the Company with information to enable it to
determine with reasonable assurance whether the provisions of this
Code are being observed by its Access Persons:
1. Each Access Person of the Company, other than a director who is
not an "interested person" of the Company (as defined in the 1940
Act), shall submit to the administrator an Initial Holdings
Report in the form attached
5
<PAGE>
hereto as Exhibit A that lists all securities other than Exempt
Securities beneficially owned/1/ by the Access Person. This
report must be submitted within 10 days of becoming an Access
Person (or for persons already designated as Access Persons
within 10 days of the adoption of this Code of Ethics), and must
include the title of each security, the number of shares held,
and the principal amount of the security. The Report must also
include a list of any securities accounts maintained with any
broker, dealer or bank:
2. Each Access Person of the Company other than a director who is
not an "interested person" of the Company (as defined in the 1940
Act) shall also submit to the administrator an Annual Holdings
Report attached hereto as Exhibit A no later than 30 days after
the end of the calendar year. The Annual Holdings Report must
list all securities other than Exempt Securities beneficially
owned by the Access Person, the title of each security, the
number of shares held, and the principal amount of the security,
as well as a list of any securities accounts maintained with any
broker, dealer or bank.
3. Each Access Person of the Company other than a Restricted
Director or Restricted Officer shall direct his or her broker to
supply to the Compliance Officer of the Company's administrator,
on a timely basis, duplicate copies of confirmations of all
securities transactions in which the person has, or by reason of
such transaction acquires any direct or indirect beneficial
ownership and copies of periodic statements for all securities
accounts.
4. Each Access Person of the Company, other than a director who is
not an "interested person" (as defined in the 1940 Act), shall
submit reports in the form attached hereto as Exhibit B to the
Company's administrator, showing all transactions in securities
other than Exempt Securities in which the person has, or by
reason of such transaction acquires, any direct or indirect
beneficial ownership, as well as all accounts established with
______________________
/1/ You will be treated as the "beneficial owner" of a security under this
policy only if you have a direct or indirect pecuniary interest in the security.
(a) A direct pecuniary interest is the opportunity, directly or
indirectly, to profit, or to share the profit, from the transaction.
(b) An indirect pecuniary interest is any nondirect financial interest,
but is specifically defined in the rules to include securities held by
members of your immediate family sharing the same household;
securities held by a partnership of which you are a general partner;
securities held by a trust of which you are the settlor if you can
revoke the trust without the consent of another person, or a
beneficiary if you have or share investment control with the trustee;
and equity securities which may be acquired upon exercise of an option
or other right, or through conversion.
For interpretive guidance on this test, you should consult counsel.
6
<PAGE>
brokers, dealers or banks during the quarter in which any securities
were held for the direct or indirect beneficial interest of the Access
Person./2/ Such reports shall be filed no later than 10 days after the
end of each calendar quarter. An Access Person of the Company need not
make a quarterly transaction report under this paragraph if all of the
information required by this paragraph 4 is contained in the brokerage
confirmations or account statements required to be submitted under
paragraph 3.
5. Each director who is not an "interested person" of the Company need
not make an initial or annual holdings report but shall submit the
same quarterly report as required under paragraph 4 to the Company's
administrator, but only for a transaction in a security other than an
Exempt Security where he or she knew at the time of the transaction
or, in the ordinary course of fulfilling his or her official duties as
a director or officer, should have known that during the 15-day period
immediately preceding or after the date of the transaction, such
security is or was purchased or sold, or considered for purchase or
sale, by the Company.
6. The Company's administrator shall notify each Access Person of the
Company who may be subject to the pre-clearance requirement or
required to make reports pursuant to this Code of Ethics that such
person is subject to the pre-clearance or reporting requirements and
shall deliver a copy of this Code of Ethics to each such person.
7. The Company's administrator shall review the initial holdings reports,
annual holdings reports, and quarterly transaction reports received,
and as appropriate compare the reports with the pre-clearance
authorization received, and report to the Company's Board of
Directors:
a. with respect to any transaction that appears to evidence a
possible violation of this Code of Ethics; and
b. apparent violations of the reporting requirement stated herein.
8. The Board shall consider reports made to it hereunder and shall
determine whether the policies established in Sections IV and V of
this Code of Ethics have been violated, and what sanctions, if any,
should be imposed on the violator, including but not limited to a
letter of censure, suspension or termination of the employment of the
violator, or the unwinding of the transaction and disgorgement of any
profits to the Company. The Board shall review the operation of this
Code of Ethics at least once a year.
9. The Company's investment adviser, sub-advisers and principal
underwriter shall adopt, maintain and enforce separate codes of ethics
with
_______________________________
/2/ See footnote 1 above.
7
<PAGE>
respect to their personnel in compliance with Rule 17j-1 and Rule 204-
2(a)(12) of the Investment Advisers Act of 1940 or Section 15(f) of
the Securities Exchange Act of 1934, as applicable, and shall forward
to the Company's administrator and the Company's counsel copies of
such codes and all future amendments and modifications thereto. The
Board shall review and approve such codes at least once a year.
Furthermore, any material changes to an investment adviser's or
principal underwriter's code will be approved by the Board at the next
scheduled quarterly board meeting and in no case more than six months
after such change.
10. At each quarterly Board of Directors' meeting, the administrator,
investment adviser, sub-advisers and principal underwriter of the
Company shall provide a written report to the Company's Board of
Directors stating:
a. any reported securities transaction that occurred during the
prior quarter that may have been inconsistent with the provisions
of the codes of ethics adopted by the Company's investment
adviser, sub-advisers or principal underwriter; and
b. all disciplinary actions/3/ taken in response to such violations.
11. At least once a year, the Company's investment adviser, sub-advisers
and principal underwriter shall provide to the Board a written report
which contains: (a) a summary of existing procedures concerning
personal investing by advisory persons and any changes in the
procedures during the past year; (b) an evaluation of current
compliance procedures and a report on any recommended changes in
existing restrictions or procedures based upon the Company's
experience under this Code of Ethics, industry practices, or
developments in applicable laws and regulations; (c) a description of
any issues arising under the Code of Ethics or procedures since the
last report, including but not limited to, information about material
violations of the code or procedures and sanctions imposed in response
to material violations; and (d) a certification that the procedures
which have been adopted are those reasonably necessary to prevent
Access Persons from violating the respective Codes of Ethics.
12. This Code of Ethics, the codes of the investment adviser, sub-advisers
and principal underwriter, a copy of each report by an Access Person,
any written report hereunder by the Company's administrator,
investment adviser, sub-advisers or principal underwriter, records of
approvals relating to Initial Public Offerings and Limited Offerings,
lists of all
_____________________
/3/ Disciplinary action includes but is not limited to any action that has a
material financial effect upon the employee, such as fining, suspending, or
demoting the employee, imposing a substantial fine or requiring the disgorgement
of profits.
8
<PAGE>
persons required to make reports, and a list of all persons
responsible for reviewing such reports shall be preserved with the
Company's records for the period required by Rule 17j-1.
VI. Certification.
-------------
Each Access Person will be required to certify annually that he or she has
read and understood this Code of Ethics, and will abide by it. Each Access
Person will further certify that he or she has disclosed or reported all
personal securities transactions required to be disclosed or reported under the
Code of Ethics. A form of such certification is attached hereto as Exhibit B.
The Board of Directors of
Excelsior Funds, Inc.
9
<PAGE>
Exhibit A
EXCELSIOR FUNDS, INC.
Holdings Report
For the Year/Period Ended________________________________
(month/day/year)
[_] Check Here if this is an Initial Holdings Report
To: Chase Global Funds Service Company, as Co-Administrator of the above listed
Company
As of the calendar year/period referred to above, I have a direct or
indirect beneficial ownership interest in the securities listed below which are
required to be reported pursuant to the Code of Ethics of the Company:
Title of Number of Principal
Security Shares Amount
-------- ------ ------
The name of any broker, dealer or bank with whom I maintain an account
in which my securities are held for my direct or indirect benefit are as
follows:
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) excludes other transactions not
required to be reported, and (iii) is not an admission that I have or had any
direct or indirect beneficial ownership in the securities listed above.
Signature: ___________________________
Print Name: ___________________________
A-1
<PAGE>
Exhibit B
EXCELSIOR FUNDS, INC.
Securities Transaction Report
For the Calendar Quarter Ended _______________________________
(month/day/year)
To: Chase Global Funds Service Company, as Co-Administrator of the above listed
Company
During the quarter referred to above, the following transactions were
effect in securities of which I had, or by reason of such transaction acquired,
direct or indirect beneficial ownership, and which are required to be reported
pursuant to the Code of Ethics of the Company:
<TABLE>
<CAPTION>
Number of Interest Rate Nature of Broker/Dealer
Shares or and Maturity Transaction or Bank
Title of Date of Principal Date (if Dollar Amount (Purchase, Through Whom
Security Transaction Amount applicable) of Transaction Sale, Other) Price Effected
- -------- ----------- ------ ----------- -------------- ------------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
For each Access Person of the Company, other than a director who is
not an "interested person" (as defined in the 1940 Act), provide the following
information with respect to any account established by you during the quarter
referred to above in which securities were held during the quarter for your
direct or indirect benefit:
1. The name of the broker, dealer or bank with whom you established
the account.
2. The date the account was established.
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) excludes other transactions not
required to be reported, and (iii) is not an admission that I have or had any
direct or indirect beneficial ownership in the securities listed above.
Signature: _____________________________
Print Name: _____________________________
B-1
<PAGE>
Exhibit C
EXCELSIOR FUNDS, INC.
ANNUAL CERTIFICATE
Pursuant to the requirements of the Code of Ethics of Excelsior
Funds, Inc. (the "Company"), the undersigned hereby certifies as follows:
1. I have read the Company's Code of Ethics.
2. I understand the Code of Ethics and acknowledge that I am subject
to it.
3. Since the date of the last Annual Certificate (if any) given
pursuant to the Code of Ethics, I have reported all personal
securities transactions required to be reported under the
requirements of the Code of Ethics.
Date: _____________________________ _______________________________
Print Name
_______________________________
Signature
C-1
<PAGE>
EXHIBIT (p)(2)
U.S. TRUST
INVESTMENT ADVISER
CODE OF ETHICS
Revised: August 18, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
I. INTRODUCTION................................................................... 1
II. RULE 17j-1 OF THE INVESTMENT COMPANY ACT & ACKNOWLEDGMENT...................... 1
III. PERSONS SUBJECT TO THIS CODE AND OTHER DEFINITIONS............................. 1
IV. RESTRICTIONS ON PERSONAL INVESTMENT ACTIVITIES................................. 3
(a) Prohibition against Acquiring Securities in an Initial Public Offering ("IPO")
Within 30 days of the Initial Offering......................................... 3
(b) Prior Approval of Private Placement Investments................................ 4
(c) Blackout Periods for Trading in the Same Security as a Client.................. 4
(d) Pre-Clearance of Personal Securities Transactions.............................. 5
(e) Delivery of Duplicate Trade Confirmations and Investment Account
Statements to Employer......................................................... 5
(f) Initial Disclosure of Personal Holdings & Quarterly Updates.................... 6
(g) Prohibition on Service as a Director........................................... 6
(h) Prohibition on Accepting or Giving Gifts....................................... 6
V. TRANSACTIONS AND HOLDINGS NOT SUBJECT TO THIS CODE............................. 6
VI. OVERSIGHT OF CODE OF ETHICS.................................................... 7
VII. CONFIDENTIALITY................................................................ 7
</TABLE>
-i-
<PAGE>
I. INTRODUCTION
------------
High ethical standards are essential not only to the success of U.S. Trust
Corporation and its affiliates ("U.S. Trust"), but to maintain the confidence of
investors. There is a long standing recognition of the conflicts of interest
that potentially arise in connection with the personal trading activities of
investment personnel. Because it provides investment advice to registered
investment company clients (each a "Mutual Fund Company"), U.S. Trust is
required under applicable federal law/1/ to adopt a code of ethics containing
provisions designed to detect and prevent improper activity by employees with
access to certain Mutual Fund Company investment-related information. The U.S.
Trust Code of Ethics (the "Code") applies to each "Covered Person" which is a
term defined in Section III. This includes employees who service personal and
institutional clients as well as those who service Mutual Fund Companies.
Because of the nature of our business, you may be exposed to material,
non-public information ("Inside Information"). Federal. securities law prohibits
your use of such information. U.S. Trust owes a fiduciary duty to its clients
that requires its employees to act solely for the benefit of its clients. Our
own long-term business interests are best served by adherence to the principle
that our clients' interests come first. All employees owe U.S. Trust a duty of
loyalty that bars them from engaging in any activity which may give rise to a
potential conflict of interest between U.S. Trust and its clients or the
appearance of such a conflict.
Our goal is to impose as few restrictions as possible consistent with protecting
U.S. Trust, its clients and you from the damage that could result from real or
apparent conflicts of interest or potential violations of law. While it is
impossible to define all situations that pose such a risk, this Code is designed
to address those circumstances in which such risk is likely to exist.
Adherence to this Code and its restrictions on personal investing is a basic
condition of your employment. If you have any doubt about how this Code applies
to any activity, you should consult your local Compliance Officer or a member of
the Corporate Compliance Division, which is responsible for administering this
Code.
II. RULE 17j-1 OF THE INVESTMENT COMPANY ACT & ACKNOWLEDGMENT
---------------------------------------------------------
This Code is adopted pursuant to SEC Rule 17j-1. A copy of the Rule is attached
as Exhibit A. All "Access Persons," which is a term defined in Section III, are
required to (a) be familiar with this Rule, (b) execute the attached
Acknowledgment Form and (c) return the signed form to the Corporate Compliance
Division at H-26.
III. PERSONS SUBJECT TO THIS CODE AND OTHER DEFINITIONS
--------------------------------------------------
(a) This Code applies to every "Covered Person." They are:
___________________
/1/ See SEC Rule 17j-1 promulgated under the Investment Company Act of 1940.
<PAGE>
(1) "Access Persons" - any U.S. Trust employee who, in
connection with his2 regular duties or function makes,
participates in, or obtains information regarding the
purchase or sale of a security by or for any U.S. Trust
client (including Mutual Fund Companies), or whose function
relates to the making of any recommendations with respect to
such purchases or sales (for example, portfolio managers,
analysts, traders and research personnel); and
(2) The following other individual entities:
(A) a member of an Access Person's immediate family (i.e.,
spouse and dependent children);
(B) a person who lives in an Access Person's household and
over whose purchases, sales, or other trading
activities an Access Person directly or indirectly
exercises influence;
(C) a relative whose financial affairs an Access Person
"controls," whether by contact (such as a Deed of
Trust) or by convention (such as a relative he
traditionally advises with regard to investment
choices, invests for or otherwise assists financially);
(D) an investment or trust account, other than one
maintained at U.S. Trust, over which an Access Person
has investment control or discretion;
(E) a trust or other arrangement that names an Access
Person as a beneficiary; and
(F) a non-public entity (partnership, corporation or
otherwise) of which an Access Person is a director,
officer, partner or employee, or in which he owns 10%
or more of the stock, a "controlling" interest as
generally defined by securities laws, or over which he
exercises effective control.
(b) "Investment Account" means any securities account:
(1) in which an Access Person holds a beneficial interest,
regardless of whether the account is managed by an
independent third party or self-directed; or
___________________
/2/ Terms in this Policy referring to gender apply to either gender and the
singular include the plural.
-2-
<PAGE>
(2) on which an Access Person, his spouse or dependent child is
named in the title of the account; or
(3) for which an Access Person acts as Guardian, Trustee,
Custodian, etc., other than those maintained at U.S. Trust;
or
(4) over which an Access Person exercises control, either
directly (e.g., by Power of Attorney) or indirectly (e.g.,
as an advisor).
A comprehensive list of all Access Persons will be compiled and maintained
by the Corporate Compliance Division with the assistance of those
supervising such employees.
(c) "Blackout Period" - see Section IV(c).
(d) "Code" - see Section I.
(e) "de minimus value" - see Section IV(h).
(f) "Front Running" - see Section IV(c).
(g) "Inside Information" - see Section I.
(h) "Investment Account Records" - see Section IV(e).
(i) "IPO" - see Section IV(a).
(j) "Mutual Fund Company" - see Section I.
(k) "Significant Block" - see Section IV(c).
(l) "U.S. Trust" - see Section I.
IV. RESTRICTIONS ON PERSONAL INVESTMENT ACTIVITIES
----------------------------------------------
Note: The following restrictions apply to all Covered Persons, not just Access
Persons.
(a) Prohibition against Acquiring Securities in an Initial Public
-------------------------------------------------------------
Offering ("IPO") Within 30 days of the Initial Offering. The
-------------------------------------------------------
opportunity to invest in an IPO can be highly sought after and these
opportunities are often available only to a limited number of
investors. Purchases of IPO's by Covered Persons pose various
potential conflicts of interest. First, an opportunity for Covered
Persons to participate in a "hot issue" or other attractive IPO is
not likely to be viewed as a random event. Second, it may create the
impression that future investment decisions for a client were not
pursued solely because they were in the best interests of such
client. Third, the realization of any short-term profits may create
at least the appearance that an investment opportunity that should
have been available to a client was diverted to a Covered Person's
personal benefit. U.S.
-3-
<PAGE>
Trust believes that prohibiting a Covered Person's purchase of a
security in an IPO until 30 days after the offering date will reduce
these potential conflicts.
(b) Prior Approval of Private Placement Investments. Companies may court
-----------------------------------------------
Covered Persons through private placements in order to encourage
Access Persons to have their clients invest in the company when it
later undertakes an IPO. If an Access Person invests his client's
assets in such a situation, a direct conflict of interest arises
because the client's investment may result in an increase in value
of the issuer's securities and thus increase the value of a Covered
Person's personal holdings.
U.S. Trust recognizes that most private placements will not raise
such conflicts and a complete ban on such investments would restrict
many legitimate investment opportunities. Therefore, an Access
Person must submit a written approval request for any Covered
Person's investment in private placement securities to, and obtain
prior approval from, his Direct Supervisor and the Head of the
Alternative Investment Suitability Committee. Furthermore, an Access
Person must disclose any Covered Person's holdings in private
placement securities to his Direct Supervisor and the Head of the
Alternative Investment Suitability Committee if that Access Person
plays a material role in U.S. Trust's subsequent investment decision
regarding the same issuer. Once this disclosure is made, an
independent review of U.S. Trust's investment decision must be made
by investment personnel with no personal interest in that particular
issuer. This process will accommodate personal investments for
Covered Persons and provide scrutiny where there is a potential
conflict of interest.
(c) Blackout Periods for Trading in the Same Security as a Client. All
-------------------------------------------------------------
Covered Persons are prohibited from trading in a security on a day
during which any Mutual Fund Company has a pending "buy" or "sell"
order in the same security until such company's order is executed or
withdrawn. In addition, all Covered Persons are prohibited from
buying or selling a security within seven (7) calendar days before
and after any Mutual Fund Company trades in that security. The
Blackout Period before a Mutual Fund Company trades is aimed at
preventing "Front Running." The Blackout Period after a Mutual Fund
Company trades is designed to allow sufficient time for the
dissipation of the market effect of the Mutual Fund Company's trade
before the Covered Person trades.
A "Blackout Period" is a period of time during which Covered Persons
may not trade in a given security. "Front Running" is trading in
advance of action on a client account trade order while knowing
about that order. This type of knowledge is considered Inside
Information. Using Inside Information to trade (other than for the
client account(s) subject to the trade order) violates securities
laws and the U.S. Trust Business Ethics Policy. Covered Persons are
prohibited from purchasing or selling securities about which an
Access Person has Inside Information.
-4-
<PAGE>
All Covered Persons are prohibited from trading a security within
three (3) business days before and after U.S. Trust purchases or
sells a "significant block" of that same security for any client
account. A "Significant Block" will be defined by evaluating the
individual issuer.
There may be some limited circumstances where exceptions to these
restrictions will be allowed. Exception requests must be discussed
with the Corporate Compliance Division and approval from the
appropriate officer obtained prior to executing any such
transaction.
(d) Pre-Clearance of Personal Securities Transactions. All Covered
-------------------------------------------------
Persons must pre-clear personal securities transactions through the
Corporate Compliance Division. To do so, they should contact the
Division a reasonable time before executing an intended securities
transaction. The proposed transaction will be promptly reviewed in
an attempt to determine if it would violate this Code.
The following transactions are exempt from this pre-clearance
requirement.
(1) Any equity securities transaction or related transactions
involving 500 shares or less in the aggregate if, at the
time of the transaction:
(A) the Access Person has no knowledge the security is
being considered for purchase or sale by, or is
actually being purchased or sold for, a Mutual Fund
Company in the mutual fund complex he services or by
U.S. Trust; and
(B) the issuer of the security being purchased or sold has
a market capitalization greater than $1 billion.
(2) Any fixed income securities transaction involving $100,000
principal amount or less if, at the time of the transaction,
the Access Person has no knowledge that the security is
being considered for purchase or sale by, or is actually
being purchased or sold for, a Mutual Fund Company in the
complex he services or by U.S. Trust.
(3) Transactions in securities not eligible for purchase or sale
by a Mutual Fund Company and the value of such securities is
not based upon, related to, or determined by, any security
eligible for purchase or sale by a Mutual Fund Company.
(e) Delivery of Duplicate Trade Confirmations and Investment Account
----------------------------------------------------------------
Statements to Employer. Every Access Person must disclose each
----------------------
existing Investment Account to the Corporate Compliance Division and
authorize that Division to direct his broker(s) to supply it with
duplicate copies of trade confirmations and monthly statements
reflecting transactions affecting such accounts ("Investment Account
Records"). Transactions reported on the
-5-
<PAGE>
Investment Account Records will be reviewed and compared against
Mutual Fund Company and U.S. Trust client transactions. The
Investment Account Records allow U.S. Trust to verify compliance
with this Code. Each Access Person must promptly notify the
Corporate Compliance Division when an Investment Account is opened,
closed or moved.
(f) Initial Disclosure of Personal Holdings & Quarterly Updates. Upon
-----------------------------------------------------------
commencement of employment, each Access Person is required to submit
to the Corporate Compliance Division a completed Disclosure of
Personal Holdings From (attached) listing all Investment Accounts
and securities otherwise held by persons having an interest in an
Investment Account. This Disclosure must be updated each calendar
quarter during his employment. The completed update must be
forwarded to the Corporate Compliance Division and will be used to
verify all Investment Account Records are being collected.
(g) Prohibition on Service as a Director. Each Access Person is
------------------------------------
prohibited from serving on the board of directors of any publicly
traded company absent prior approval from a member of the National
Operating Committee. Approval will be based upon a determination
that board service would be consistent with the U.S. Trust's
interests in servicing its clients. This restriction does not apply
to service on the board of any not-for-profit organization.
(h) Prohibition on Accepting or Giving Gifts. Each Covered Person is
----------------------------------------
prohibited from accepting or giving any gift or more than de minimus
value from or to any individual doing business with, or on behalf
of, any U.S. Trust client. For the purposes of this Code, "de
minimus value" means $250.00. Normal business courtesies such as
business meals and entertainment are excluded from the definition of
"gift."
V. TRANSACTIONS AND HOLDINGS NOT SUBJECT TO THIS CODE
--------------------------------------------------
The following transactions and holdings are not subject to this Code.
(a) Transactions in, and holdings of, securities issued by the United
States Government.
(b) Transactions in, and holdings of, shares of open-ended investment
companies (commonly known as mutual funds).
(c) Transactions involving, and holdings of, bank certificates of
deposit.
(d) Transactions and holdings in any account over which a Covered Person
has no direct or indirect influence or control (i.e., blind trust,
discretionary account or trust managed by a third party).
-6-
<PAGE>
(e) Transactions and holdings in Automatic Dividend Reinvestment Plans
(commonly referred to as "DRIPs").
VI. OVERSIGHT OF CODE OF ETHICS
---------------------------
Each Access Person must annually sign and deliver to the Corporate
Compliance Division a form (attached) acknowledging his familiarity with
this Code. In addition, any situation that may involve a conflict of
interest or other potential violation of this Code must be reported
promptly to the Corporate Compliance Division.
Investment Account Records will be reviewed on an ongoing basis by the
Corporate Compliance Division and compared to transactions entered into by
U.S. Trust for its customers. Any transactions believed to be a violation
of this Code will be reported promptly to U.S. Trust's Chief Investment
Officer.
The Chief Investment Officer shall consider reports made to him and, upon
determining a violation has occurred, may impose such sanctions or
remedial action as he deems appropriate or otherwise required by law.
These sanctions may include, among other things, disgorgement of profits,
suspension or termination of employment with U.S. Trust and civil or
criminal penalties.
VII. CONFIDENTIALITY
---------------
All information collected pursuant to this Code will be treated
confidentially to the extent required by law.
-7-
<PAGE>
U.S. TRUST INVESTMENT ADVISOR CODE OF ETHICS
ACKNOWLEDGMENT
I hereby acknowledge receipt of the U.S. Trust Investment Adviser Code of
Ethics and certify I have read and agree to abide by it.
I also confirm I have disclosed to the Corporate Compliance Division all
existing Investment Accounts (as defined in the Code) on the accompany form. I
authorize that Division to instruct all brokers maintaining an Investment
Account to supply duplicate copies of trade confirmations and monthly statements
for such accounts to the Corporate Compliance Division.
I certify I have never been found civilly liable for, nor criminally guilty
of, insider trading and that no legal proceedings alleging I violated insider
trading laws are now pending or, to the best of my knowledge, threatened by any
person or authority.
Date: __________________________ _____________________________
(Signature)
_____________________________
(Print Name)
-8-
<PAGE>
DISCLOSURE OF PERSONAL HOLDINGS
This form is to be completed by all Access Persons when hired and sent to the
Corporate Compliance Division.
CHECK ONE BOX
- -------------
[_] There are no Investment Accounts I must identify under the U.S. Trust
Investment Adviser Code of Ethics.
[_] The information listed below describes all Investment Accounts I must
disclose under the Code. There are no securities subject to the Code held
outside an Investment Account.
[_] The securities subject to the Code held OUTSIDE an Investment Account are
listed on Page 2. (Supply broker name, address, telephone number, account
number and title.)
Use this space to describe Investment Accounts (attach additional pages as
necessary). If you are reporting a new Investment Account for the first time,
also attach copies of all statements since it was opened.
Account Name: _________________________________________________
Account #: _________________________________________________
S.S. or Tax ID #: _________________________________________________
Firm Name: _________________________________________________
Address: _________________________________________________
_________________________________________________
Account Rep: _________________________________________________
Account Name: _________________________________________________
Account #: _________________________________________________
S.S. or Tax ID#: _________________________________________________
Firm Name: _________________________________________________
Address: _________________________________________________
_________________________________________________
Account Rep: _________________________________________________
(Use additional sheets as necessary)
------------------------------------
<PAGE>
LIST OF SECURITIES SUBJECT TO THE CODE HELD OUTSIDE AN INVESTMENT ACCOUNT
- --------------------------------------------------------------------------------
SECURITY DATE ACQUIRED PRICE # SHARES EXECUTING BROKER
- --------------------------------------------------------------------------------
SIGNATURE: _____________________________________________________________________
PRINTED NAME: ____________________________________________________
Dated: _______________________
-2-
<PAGE>
DISCLOSURE OF PERSONAL HOLDINGS & QUARTERLY UPDATE
--------------------------------------------------
This form is to be completed by all Access Persons quarterly and sent to the
Corporate Compliance Division.
CHECK ALL APPROPRIATE BOXES (provide details as necessary)
- ---------------------------
[_] There are no Investment Accounts I must identify under the U.S. Trust
Investment Adviser Code of Ethics.
[_] There has been no change in Investment Account information I must provide
under the Code since I last completed this disclosure.
[_] The Investment Accounts I have previously described in these disclosures
still exist and the additional Investment Accounts listed below have been
opened since I last completed this disclosure.
[_] The Investment Accounts listed below I previously described in my
disclosures and no longer exist.
[_] The Investment Accounts listed below have been established since I last
completed this disclosure.
[_] The previously undisclosed securities subject to the Code listed below are
held outside an Investment Account.
Use this space to describe Investment Accounts (attach additional pages as
necessary). If you are reporting a new Investment Account for the first time,
also attach copies of all statements since it was opened.
[_] New [_] Closed Investment Account
Account Name: ______________________________________________
Account #: ______________________________________________
S.S. or Tax ID#: ______________________________________________
Firm Name: ______________________________________________
Address: ______________________________________________
______________________________________________
Account Rep: ______________________________________________
<PAGE>
DISCLOSURE OF PERSONAL HOLDINGS & QUARTERLY UPDATE
--------------------------------------------------
(continued)
[_] New [_] Closed Investment Account
Account Name: ______________________________________________
Account #: ______________________________________________
S.S. or Tax ID#: ______________________________________________
Firm Name: ______________________________________________
Address: ______________________________________________
______________________________________________
Account Rep: ______________________________________________
[_] New [_] Closed Investment Account
Account Name: ______________________________________________
Account #: ______________________________________________
S.S. or Tax ID#: ______________________________________________
Firm Name: ______________________________________________
Address: ______________________________________________
______________________________________________
Account Rep: ______________________________________________
-2-
<PAGE>
LIST OF SECURITIES SUBJECT TO THE CODE HELD OUTSIDE AN INVESTMENT ACCOUNT
- --------------------------------------------------------------------------------
SECURITY DATE ACQUIRED PRICE # SHARES EXECUTING BROKER
- --------------------------------------------------------------------------------
SIGNATURE AND DATE: ____________________________________________________________
PRINTED NAME: __________________________________________
DATE: __________________________
-3-
<PAGE>
Exhibit A
---------
Text of Rule 17j-1 of The Investment Company Act
------------------------------------------------
Rule 17j-1: Certain unlawful acts, practices, or courses of business and
------------------------------------------------------------
requirements relating to codes of ethics with respect to registered investment
- ------------------------------------------------------------------------------
companies.
- ---------
(a) It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company, or any affiliated
person of an investment adviser of or principal underwriter for a
registered investment company in connection with the purchase or sale,
directly or indirectly, by such person of a security held or to be
acquired, as defined in this section, by such registered investment
company.
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they
are made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
(b)
(1) Every registered investment company, and each investment adviser
of or principal underwriter for such investment company, shall
adopt a written code of ethics containing provisions reasonably
necessary to prevent its access persons from engaging in any act,
practice, or course of business prohibited by paragraph (a) of
this section and shall use reasonable diligence, and institute
procedures reasonably necessary, to prevent violations of such
code.
(2) The requirements of paragraph (b)(1) shall not apply to any
underwriter (i) which is not an affiliated person of the
registered investment company or its investment adviser, and (ii)
none of whose officers, directors or general partners serves as
an officer, director or general partner of such registered
investment company or investment adviser.
<PAGE>
(c)
(1) Every access person of a registered investment company or of an
investment adviser of or principal underwriter for such
investment company shall report to such investment company,
investment adviser or principal underwriter of which he or she is
an access person the information described in paragraph (c)(2)
with respect to transactions in any security in which such access
person has, or by reason of such transaction acquires, any direct
or indirect beneficial ownership in the security: Provided,
however, that any such report may contain a statement that the
report shall not be construed as an admission by the person
making such report that he or she has any direct or indirect
beneficial ownership in the security to which the report relates.
For purposes of this section, beneficial ownership shall be
interpreted in the same manner as it would be in determining
whether a person is subject to the provisions of section 16 of
the Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules
and regulations thereunder, except that the determination of
direct or indirect beneficial ownership shall apply to all
securities which the access person has or acquires.
(2) Every report required to be made pursuant to paragraph (c)(1)
shall be made not later than 10 days after the end of the
calendar quarter in which the transaction to which the report
relates was effected, and shall contain the following
information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each security
involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effect; and
(iv) The name of the broker, dealer or bank with or through
whom the transaction was effected.
(3) Notwithstanding the provision of paragraph (c)(1), no person
shall be required to make a report:
(i) With respect to transactions effected for any account over
which such person does not have any direct or indirect
influence or control;
(ii) If such person is not an "interested person" of a
registered investment company within the meaning of
section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)], and
would be required to make such
-2-
<PAGE>
a report solely by reason of being a director of such
investment company, except where such director knew or, in
the ordinary course of fulfilling his official duties as a
director of the registered investment company, should have
known that during the 15-day period immediately preceding
or after the date of the transaction in a security by the
director such security is or was purchased or sold by such
investment company or such purchase or sale by such
investment company is or was considered by the investment
company or its investment adviser;
(iii) Where the principal underwriter, as to which such person
is an access person, (A) is not an affiliated person of
the registered investment company or any investment
adviser of such investment company, and (B) has no
officers, directors, or general partners who serve as
officers, directors or general partners of such investment
company or any such investment adviser; or
(iv) Where a report made to an investment adviser would
duplicate information recorded pursuant to Rules 204-
2(a)(12) or 204-2(a)(13)[17 CFR 275.204-2(a)(12) and
275.204-2(a)(13)] under the Investment Advisers Act of
1940 [15 U.S.C. 80b-1, et. seq.].
(4) Each registered investment company, investment adviser and
principal underwriter to which reports are required to be made
pursuant to this section shall identify all access persons who
are under a duty to make such reports to it and shall inform such
persons of such duty.
(d) Each registered investment company, investment adviser and principal
underwriter which is required to adopt a code of ethics or to which
reports are required to be made by access persons shall, at its
principal place of business, maintain records in the manner and to the
extent set forth below, and make such records available to the
Commission or any representative thereof at any time and from time to
time for reasonable periodic, special or other examination.
(1) A copy of each such code of ethics which is, or at any time
within the past five years has been, in effect shall be preserved
in an easily accessible place;
(2) A record of any violation of such code of ethics, and of any
action taken as a result of such violation, shall be preserved in
an easily accessible place for a period of not less than five
years following the end of the fiscal year in which the violation
occurs;
(3) A copy of each report made by an access person pursuant to this
rule shall be preserved for a period of not less than five years
from the end of the
-3-
<PAGE>
fiscal year in which it is made, the first two years in an easily
accessible place; and
(4) A list of all persons who are, or within the past five years have
been, required to make reports pursuant to this section shall be
maintained in an easily accessible place.
(e) As used in this rule
(1) "Access Person" means:
(i) With respect to a registered investment company or an
investment adviser thereof, any director, officer, general
partner, or advisory person, as defined in this section,
of such investment company or investment adviser;
(ii) With respect to a principal underwriter, any director,
officer, or general partner of such principal underwriter
who in the ordinary course of his business makes,
participates in or obtains information regarding the
purchase or sale of securities for the registered
investment company for which the principal underwriter so
acts or whose functions or duties as part of the ordinary
course of his business relate to the making of any
recommendation to such investment company regarding the
purchase or sale of securities.
(iii) Notwithstanding the provisions of paragraph (e)(1)(i),
where the investment adviser is primarily engaged in a
business or businesses other than advising registered
investment companies or other advisory clients, the term
"access person" shall mean: any director, officer, general
partner, or advisory person of the investment adviser who,
with respect to any registered investment company, makes
any recommendation, participates in the determination of
which recommendation shall be made, or whose principal
function or duties relate to the determination of which
recommendation shall be made to any registered investment
company, or who, in connection with his duties, obtains
any information concerning securities recommendations
being made by such investment adviser to any registered
investment company.
(iv) An investment adviser is "primarily engaged in a business
or businesses other than advising registered investment
companies or other advisory clients" when, for each of its
most recent three fiscal years or for the period of time
since its organization, whichever is lesser, the
investment adviser derived, on an unconsolidated basis,
more than 50 percent of (A) its total sales and revenues,
and (B) its
-4-
<PAGE>
income (or loss) before income taxes and extraordinary
items from such other business or businesses.
(2) "Advisory person" of a registered investment company or an
investment adviser thereof means:
(i) Any employee of such company or investment adviser (or of
any company in a control relationship to such investment
company or investment adviser) who, in connection with his
regular functions or duties, makes, participates in or
obtains information regarding the purchase or sale of a
security by a registered investment company, or whose
functions relate to the making of any recommendations with
respect to such purchases or sales; and
(ii) Any natural person in a control relationship to such
company or investment adviser who obtains information
concerning recommendations made to such company with
regard to the purchase or sale of a security.
(3) "Control" shall have the same meaning as that set forth in
section 2(a)(9) of the Act [15 U.S.C. 80a-2(a)(9)].
(4) "Purchase or sale of a security" includes, inter alia, the
writing of an option to purchase or sell a security.
(5) "Security" shall have the meaning set forth in section 2(a)(36)
of the Act [15 U.S.C. 80a-2(a)(36)], except that it shall not
include securities issued by the Government of the United States,
bankers' acceptances, bank certificates of deposit, commercial
paper and shares of registered open-end investment companies.
(6) "Security held or to be acquired" by a registered investment
company means any security as defined in this rule which, within
the most recent 15 days, (i) is or has been held by such company,
or (ii) is being or has been considered by such company or its
investment adviser for purchase by such company.
-5-
<PAGE>
EXHIBIT (p)(3)
CODE OF ETHICS REGARDING PERSONAL SECURITIES TRADING
----------------------------------------------------
Pursuant to rule 17j-1 under the Investment Company Act of 1940, this Code of
Ethics has been adopted on behalf of the Adviser, the Underwriters, and each
investment company that is both advised and distributed by an Adviser and an
Underwriter.*
1. General Fiduciary Principles
----------------------------
a) Each Access Person:
i) must place the Funds' interests ahead of the Access Person's
personal interests;
ii) must avoid conflicts or apparent conflicts of interest with the
Funds; and
iii) must conduct his or her personal transactions in a manner which
neither interferes with Fund portfolio transactions nor
otherwise takes unfair or inappropriate advantage of the Access
Person's relationship to the Fund.
The failure to recommend or purchase a Covered Security for the
Fund may be considered a violation of this Code.
b) Every Access Person must adhere to these general fiduciary principles,
as well as comply with the specific provisions and Associated
Procedures of this Code. Technical compliance with the terms of this
-------------------------------------------
Code and the Associated Procedures may not be sufficient where the
------------------------------------------------------------------
transactions undertaken by an Access Person show a pattern of abuse of
----------------------------------------------------------------------
the Access Person's fiduciary duty.
----------------------------------
2. Definitions
-----------
a) The "1940 Act" means the Investment Company Act of 1940, as amended.
b) "Access Person" means any director, trustee, officer, managing general
partner, general partner, or Advisory Person of a Fund, of the
Underwriter, and of the Adviser and all family members permanently
residing in the same household. (If non-family members also reside in
the household, the Access Person must either declare that the Access
Person has no influence on the investment decisions of the other party
or the Access Person must report the party as an Access Person.)
c) "Adviser" means any registered investment adviser that is an affiliate
or subsidiary of Federated Investors, Inc.
- -------------------------
* As the context requires, references herein to the singular include the plural
and masculine pronouns include the feminine.
<PAGE>
d) "Advisory Person" means (i) any employee of the Underwriter, of the
Adviser or of any company in a control relationship to the Underwriter
(which would include any operating company that is an affiliate or a
subsidiary of Federated Investors, Inc.), who, in connection with the
employee's regular functions or duties, makes, participates in, or
obtains information regarding the purchases or sales of a Covered
Security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any
natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to
the purchase or sale of a Covered Security.
e) "Associated Procedures" means those policies, procedures and/or
statements that have been adopted by the Underwriter, the Adviser or
the Fund, and which are designed to supplement this Code and its
provisions.
f) "Beneficial ownership" will be attributed to an Access Person in all
instances where the Access Person (i) possesses the ability to
purchase or sell the Covered Securities (or the ability to direct the
disposition of the Covered Securities); (ii) possesses voting power
(including the power to vote or to direct the voting) over such
Covered Securities; or (iii) receives any benefits substantially
equivalent to those of ownership. Beneficial ownership shall be
interpreted in the same manner as it would be in determining whether a
person is subject to the provisions of Section 16a-l(a)(2) of the
Securities Exchange Act of 1934, and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership shall apply to all Covered Securities which an
Access Person has or acquires.
g) "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the 1940 Act.
h) Except as provided in this definition, "Covered Security" shall
include any Security, including without limitation: equity and debt
securities; derivative securities, including options on and warrants
to purchase equity or debt securities; shares of closed-end investment
companies; investments in unit investment trusts; and Related
Securities. "Related Securities" are instruments and securities that
are related to, but not the same as, a Covered Security. For example,
a Related Security may be convertible into a Covered Security, or give
its holder the right to purchase the Covered Security. For purposes of
reporting, "Covered Security" shall include futures, swaps and other
derivative contracts.
"Covered Security" shall not include: direct obligations of the
Government of the United States (regardless of their maturities);
bankers' acceptances; bank certificates of deposit; commercial paper;
high quality short-term debt instruments, including repurchase
agreements; and shares of registered open-end investment companies.
-2-
<PAGE>
i) "Disinterested director" means a director, trustee, or managing
general partner of the Fund who is not an "interested person" of the
Fund within the meaning of Section 2(a)(19) of the 1940 Act.
j) "Fund" means each investment company registered under the 1940 Act
(and any series or portfolios of such company) and any other account
advised by an Adviser.
k) "Initial Public Offering" means an offering of securities registered
under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements
of sections 13 or 15(d) of the Securities Exchange Act of 1934.
l) "Investment Personnel" include: Access Persons with direct
responsibility and authority to make investment decisions affecting
the Fund (such as portfolio managers and chief investment officers);
Access Persons who provide information and advice to such portfolio
managers (such as securities analysts); and Access Persons who assist
in executing investment decisions for the Fund (such as traders).
m) "Private Placement" or "limited offering" means an offering that is
exempt from registration under Section 4(2) or Section 4(6) of the
Securities Act of 1933 or pursuant to rule 504, rule 505 or rule 506
under the Securities Act of 1933.
n) "Purchase or sale of a Covered Security" includes, inter alia the
----- ----
writing of an option, future or other derivative contract to purchase
or sell a Covered Security.
o) "Security" shall have the meaning set forth in Section 2(a)(36) of the
1940 Act.
p) "Underwriter" means Federated Securities Corp. and Edgewood Services,
Inc.
3. Exempt Transactions
-------------------
The prohibitions or requirements of Section 4 and Section 5 of this Code
shall not apply to:
a) Purchases or sale of the following Securities:
i) direct obligations of the Government of the United States
(regardless of their maturities). This exemption does not apply
to indirect obligations of the U.S. Government, including FNMAs,
GNMAs or FHLMCs;
ii) bankers' acceptances;
iii) bank certificates of deposit;
-3-
<PAGE>
iv) commercial paper;
v) high quality short-term debt instruments, including repurchase
agreements; and
vi) shares of registered open-end investment companies.
b) Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control.
4. Prohibited Transactions and Activities
--------------------------------------
a) Every Access Person is prohibited from acquiring any Security
distributed in an initial public offering; however, subject to
provisions of this Code and its Associated Procedures, an Access
Person may acquire the security in the secondary market.
b) Every Access Person is prohibited from acquiring any Security in a
private placement or other limited offering, without the express prior
approval of the Compliance Department. In instances where an
Investment Personnel, after receiving prior approval, acquires a
Security in a private placement, the Investment Personnel has an
affirmative obligation to disclose this investment to the Chief
Investment Officer (or his designee) if the Investment Personnel
participates in any subsequent consideration of any potential
investment by the Fund in the issuer of that Security. Following a
purchase by an Investment Personnel in an approved personal
transaction, any purchase by the Fund of Securities issued by the same
company (other than secondary market purchases of publicly traded
Securities) will be subject to an independent review by the Compliance
Department.
c) Every Access Person is prohibited from executing a personal
transaction in any Covered Security on a day during which the Fund has
a pending "buy" or "sell" order for that Covered Security, until the
Fund's orders are either executed or withdrawn.
All Investment Personnel are prohibited from purchasing or selling any
Covered Security within seven (7) calendar days after the Fund
-----
purchases or sells the same Covered Security. Members of an Investment
Personnel group, as defined by the Compliance Department, are
prohibited from purchasing or selling any Covered Security within
seven (7) days before any Fund advised by that group purchases or
-------
sells the Covered Security.
d) Every Access Person is prohibited from profiting in the purchase and
sale, or sale and purchase, of the same (or equivalent) Covered
Security within 60 calendar days. For purposes of this prohibition,
each personal transaction in the Covered
-4-
<PAGE>
Security will begin a new 60 calendar day period. As an illustration,
if an Access Person purchases 1000 shares of Omega Corporation on June
1st, 500 shares on July 1st, and 250 shares on August 1st, the profit
from the sale of the 1000 shares purchased on June 1st is prohibited
for any transaction prior to October 1st (i.e., 60 calendar days
following August 1st). In circumstances where a personal transaction
in a Covered Security within the proscribed period is involuntary (for
example, due to unforeseen corporate activity, such as a merger), the
Access Person must notify the Compliance Department.
In circumstances where an Access Person can document personal
exigencies, the Chief Compliance Officer may grant an exemption from
the prohibition of profiting in the purchase and sale, or sale and
purchase, of the same (or equivalent) Covered Security within 60
calendar days. Such an exemption is wholly within the discretion of
the Chief Compliance Officer, and any request for such an exemption
will be evaluated on the basis of the facts of the particular
situation.
e) All Investment Personnel are prohibited from serving on the boards of
directors of any issuer of a Covered Security, absent express prior
authorization from the Compliance Department. Authorization to serve
on the board of such a company may be granted in instances where
Compliance Department determines that such board service would be
consistent with the interests of the Investment Company and its
shareholders. If prior approval to serve as a director of a company is
granted, Investment Personnel have an affirmative duty to recuse
themselves from participating in any deliberations by the Fund
regarding possible investments in the securities issued by the company
on whose board the Investment Personnel sit. (This shall not limit or
restrict service on the Board of Federated Investors, Inc.)
f) Every Access Person is prohibited from purchasing or selling, directly
or indirectly, any Covered Security in which he or she has, or by
reason of such transaction acquires, a direct or indirect beneficial
ownership interest and which he or she knows, or should have known, at
the time of such purchase or sale:
i) is being considered for purchase or sale by the Fund; or
ii) is being purchased or sold by the Fund.
g) Every Access Person is prohibited, in connection with the purchase or
sale, directly or indirectly, by the Access Person of a Security Held
or to be Acquired by the Fund:
i) from employing any device, scheme or artifice to defraud the
Fund;
ii) from making any untrue statement of a material fact to the Fund
or omit to state a material fact necessary in order to make the
statements made to the
-5-
<PAGE>
Fund, in light of the circumstances under which they are made,
not misleading;
iii) from engaging in any act, practice or course of business that
operates or would operate as a fraud or deceit on the Fund; or
iv) from engaging in any manipulative practice with respect to the
Fund.
Examples of this would include causing the Fund to purchase a Covered
Security owned by the Access Person for the purpose of supporting or
driving up the price of the Covered Security, and causing the Fund to
refrain from selling a Covered Security in an attempt to protect the
value of the Access Person's investment, such as an outstanding
option. One test which will be applied in determining whether this
prohibition has been violated will be to review the Covered Securities
transactions of Access Persons for patterns. However, it is important
to note that a violation could result from a single transaction if the
circumstances warranted a finding that the provisions of Section 1 of
this Code have been violated.
h) Notwithstanding the other restrictions of this Code to which
Disinterested directors are subject, subparagraphs (a) through (d) of
this Section 4 shall not apply to Disinterested directors.
5. Pre-clearance Requirement and Exempted Transactions
---------------------------------------------------
a) Every Access Person is prohibited from executing a personal
transaction in any Covered Security (including transactions in pension
or profit-sharing plans in which the Access Person has a beneficial
interest), without express prior approval of the Compliance
Department, in accordance with the Associated Procedures governing
pre-clearance. A purchase or sale of Covered Securities not otherwise
approved pursuant to the Associated Procedures may, upon request made
prior to the personal transaction, nevertheless receive the approval
of the Compliance Department if such purchase or sale would be: only
remotely potentially harmful to the Fund; very unlikely to affect a
highly institutional market; or clearly not related economically to
the securities to be purchased, sold or held by the Fund.
Notwithstanding the receipt of express prior approval, any purchases
or sales by any Access Person undertaken in reliance on this provision
remain subject to the prohibitions enumerated in Section 4 of this
Code.
b) The pre-clearance requirement in Section 5(a) shall not apply to:
i) Purchases or sales which are non-volitional on the part of
either the Access Person or the Fund, subject to the provisions
of Section 4(g) of this Code.
ii) Purchases which are either made solely with the dividend
proceeds received in a dividend reinvestment plan; or part of an
automatic payroll
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<PAGE>
deduction plan, whereby an employee purchases securities issued
by an employer.
iii) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its Covered
--- ----
Securities, to the extent such rights were acquired from such
issuer, and any sales of such rights so acquired.
iv) Purchases and sales of a Security that represents an interest in
certain indices as determined by the Compliance Department.
v) Transactions in a Covered Security which involve the giving of
gifts or charitable donations.
vi) Purchases and sales of Covered Securities executed by a person
deemed to be an Access Person solely by reason of his position
------
as an Officer and/or Director or Trustee of the Fund. This
exemption does not apply to those persons who are Officers
and/or Directors of an Underwriter or Adviser.
c) Notwithstanding the other restrictions of this Code to which
Disinterested directors are subject, Section 5 shall not apply to
Disinterested directors.
6. Prohibition on the Receipt of Gifts
-----------------------------------
Every Access Person is prohibited from receiving any gift, favor,
preferential treatment, valuable consideration, or other thing of more than
a de minimis value in any year from any person or entity from, to or
----------
through whom the Fund purchases or sells Securities, or an issuer of
Securities. For purposes of this Code, "de minimis value" is equal to $100
----------
or less. This prohibition shall not apply to:
i) salaries, wages, fees or other compensation paid, or expenses
paid or reimbursed, in the usual scope of an Access Person's
employment responsibilities for the Access Person's employer;
ii) the acceptance of meals, refreshments or entertainment of
reasonable value in the course of a meeting or other occasion,
the purpose of which is to hold bona fide business discussions;
iii) the acceptance of advertising or promotional material of nominal
value, such as pens, pencils, note pads, key chains, calendars
and similar items;
iv) the acceptance of gifts, meals, refreshments, or entertainment
of reasonable value that are related to commonly recognized
events or occasions, such as a promotion, new job, Christmas, or
other recognized holiday; or
-7-
<PAGE>
v) the acceptance of awards, from an employer to an employee, for
recognition of service and accomplishment.
7. Reporting
---------
Every Access Person is required to submit reports of transactions in
Covered Securities to the Compliance Department as indicated below. Any
such report may contain a statement that the report shall not be construed
as an admission by the person making such report that he or she has any
direct or indirect beneficial ownership in the Covered Security to which
the report relates.
Initial Reporting Requirements
-----------------------------
a) Within 10 calendar days of commencement of employment as an Access
Person, the Access Person will provide a list including:
i) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
ii) the name of any broker, dealer or bank maintaining an account in
which any Security was held for the direct or indirect benefit
of the Access Person as of the date of employment as an Access
Person; and
iii) the date the report is submitted to the Compliance Department.
b) Every Access Person is required to direct his broker to forward to the
Chief Compliance Officer (or his designee), on a timely basis,
duplicate copies of both confirmations of all personal transactions in
Covered Securities effected for any account in which such Access
Person has any direct or indirect beneficial ownership interest and
periodic statements relating to any such account.
Quarterly Reporting Requirements
--------------------------------
c) Every Access Person shall report the information described in Section
7(d) of this Code with respect to transactions in any Covered Security
(other than those personal transactions in Securities exempted under
Section 3 of this Code) in which such Access Person has, or by reason
of such transaction acquires, any direct or indirect beneficial
ownership.
d) Every report shall be made not later than 10 calendar days after the
end of the calendar quarter in which the transaction to which the
report relates was effected, shall be dated and signed by the Access
Person submitting the report, and shall contain the following
information:
i) the date of the transaction, the title and the number of shares,
the principal amount, the interest rate and maturity date, if
applicable of each Covered Security involved;
-8-
<PAGE>
ii) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
iii) the price at which the transaction was effected;
iv) the name of the broker, dealer or bank through whom the
transaction was effected; and
v) if there were no personal transactions in any Covered Security
during the period, either a statement to that effect or the word
"None" (or some similar designation).
e) Every Access Person shall report any new account established with a
broker, dealer or bank in which any Security was transacted or held
for the direct or indirect benefit of the Access Person during the
quarter. The report shall include the name of the entity with whom the
account was established and the date on which it was established.
Annual Reporting Requirements
-----------------------------
f) Every Access Person, on an annual basis or upon request of the Compliance
Department, will be required to furnish a list including the following
information (which information must be current as of a date no more than 30
days before the report is submitted) within 10 calendar days of the
request:
i) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership;
ii) the name of any broker, dealer or bank maintaining an account in
which any Covered Security was held for the direct or indirect
benefit of the Access Person; and
iii) the date the report is submitted to the Compliance Department.
g) In addition, every Access Person is required, on an annual basis, to
certify that they have received, read, and understand the provisions of
this Code and its Associated Procedures, and that they recognize that they
are subject to its provisions. Such certification shall also include a
statement that the Access Person has complied with the requirements of this
Code and its Associated Procedures and that the Access Person has disclosed
or reported all personal transactions in Securities that are required to be
disclosed or reported pursuant to the requirements of this Code.
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<PAGE>
Exemption for Disinterested Directors
-------------------------------------
h) A Disinterested director is exempt from the "initial reporting
requirements" and "annual reporting requirements" contained in Section
7.
i) A Disinterested director shall be exempt from the `quarterly reporting
requirements" contained in Section 7, so long as at the time of the
personal transaction in the Covered Security, the Disinterested
director neither knew, nor, in the ordinary course of fulfilling his
official duties as a director of the Fund, should have known that
during the 15-day period immediately preceding or after the date of
the transaction in the Covered Security by the Disinterested director
the Covered Security was purchased or sold by the Fund, or considered
for purchase or sale.
8. Sanctions
---------
a) Upon discovering a violation of this Code or its Associated
Procedures, the Compliance Department may take such actions or impose
such sanctions, if any, as it deems appropriate, including, but not
limited to:
i) a letter of censure;
ii) suspension;
iii) a fine;
iv) the unwinding of trades;
v) the disgorging of profits; or
vi) the termination of the employment of the violator.
(In instances where the violation is committed by a member of the
Access Person's household, any sanction would be imposed on the Access
Person.)
b) The filing of any false, incomplete or untimely reports, as required
by Section 7 of this Code, may be considered a violation of this Code.
c) All material violations of this Code and any sanctions imposed with
respect thereto shall be reported to the Board of Directors of the
Fund at least annually.
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<PAGE>
PROCEDURES FOR PRIOR APPROVAL OF PERSONAL SECURITIES
----------------------------------------------------
TRANSACTIONS BY ACCESS PERSONS
------------------------------
Process
- -------
Preclearance Approval Using TradeComply
a) An Access Person (defined to include all members of the Access
Person's household) who wishes to effect a personal securities
transaction, whether a purchase, sale, or other disposition, must
preclear the Covered Security in TradeComply prior to engaging in the
transaction. [Because TradeComply does not include securities being
contemplated for purchase by the Federated Global Management portfolio
managers, Access Persons executing transactions in foreign securities
must complete additional preclearance steps. See "Preclearing Foreign
Securities."]
b) When trading options, the Access Person must preclear the underlying
security before entering into the option contract.
c) Based on established criteria, TradeComply determines whether the
contemplated transaction should be permitted. The primary criteria
applied is whether the Covered Security is on the Federated Equity
Watch List (which is updated weekly in TradeComply) or Open Order
lists, or whether the Covered Security was traded by any of the
Federated advised funds (fund trade information is updated nightly in
TradeComply).
d) Approval is either granted or denied immediately in TradeComply.
e) If approval is denied, the Access Person is given a specific reason
for the denial. The contemplated personal transaction in that Covered
Security is prohibited until prior approval is subsequently granted
upon request in TradeComply.
f) If approval is granted, the Access Person is free to effect the
personal transaction in that Covered Security during that trading day
only. In this regard, open orders for more than one trading day (good
till cancel) must be approved daily in TradeComply to comply with the
Code.
g) All trade requests and their dispositions are maintained in
TradeComply and reviewed by the Compliance Department in conjunction
with other information provided by Access Persons in accordance with
the Code.
h) The Compliance Department reviews all exceptions generated on
TradeComply due to a fund trade occurring after preclearance approval
has been granted. The Compliance Department determines the appropriate
action to be taken to resolve each exception.
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<PAGE>
Preclearing Foreign Securities
- ------------------------------
i) All access persons wishing to execute a personal trade in a foreign
security must first preclear the security in TradeComply. TradeComply
will approve or deny the preclearance request based on its knowledge
of any fund activity in the security as well as the access person's
trading restrictions as defined by their assigned compliance group. If
the preclearance request in TradeComply is denied (Red Light), then
the personal trade may not be executed. If, however, the preclearance
request in TradeComply is approved (Green Light or Yellow Light), then
the access person must obtain a second preclearance approval from the
Federated Global trading desk prior to executing the personal trade.
j) The Head Trader or Senior Vice President in the New York office will
be responsible for granting or denying approval to the second
preclearance request. If approval is granted, then the personal trade
may be executed by the access person. If, however, approval is denied
then the personal trade may not be executed (even though the first
approval was granted in TradeComply).
k) If approval is granted, the following "Personal Transaction
Notification" form must be completed so that the Head Trader can
maintain a record of all preclearance requests.
j) The Head Trader sends a copy of any completed forms, whether approval
was granted or denied, to the Compliance Department.
If extraordinary circumstances exist, an appeal may be directed to the
Chief Compliance Officer Brian Bouda at (412) 288-8634. Appeals are solely
within the discretion of the Chief Compliance Officer.
Transactions Covered and Exemptions
- -----------------------------------
These procedures apply to Access Persons' personal transactions in "Covered
Security" as defined in Section 2 of the Code. A Covered Security includes:
equity and debt securities; options and warrants to purchase equity or debt
securities; shares of closed-end investment companies; and investments in
unit investment trusts.
These procedures do not apply to contemplated transactions in the following
---
instruments:
a) direct obligations of the Government of the United States (regardless
of their maturities). This exemption does not apply to indirect
obligations of the U.S. Government, including FNMAs, GNMAs or FBLMCs;
b) bankers' acceptances;
c) bank certificates of deposit;
d) commercial paper;
-12-
<PAGE>
e) high quality short-term debt instruments, including repurchase
agreements; and
f) shares of registered open-end investment companies;
In addition, these procedures do not apply to the following transactions:
g) Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control;
h) Purchases or sales which are non-volitional on the part of either the
Access Person or the Fund, subject to the provisions of the Code;
i) Purchases which are either: made solely with the dividend proceeds
received in a dividend reinvestment plan; or part of an automatic
payroll deduction plan, whereby an employee purchases securities
issued by an employer; and
j) Purchases effected upon the exercise of rights issued by an issuer pro
---
rata to all holders of a class of its Securities, to the extent such
----
rights were acquired from such issuer, and any sales of such rights so
acquired.
k) Purchases and sales of a Security that represents an interest in
certain indices as determined by the Compliance Department.
l) Transactions in a Covered Security which involve the giving of gifts
or charitable donations.
m) Purchases and sales of Covered Securities executed by a person deemed
to be an Access Person solely by reason of his position as an Officer
------
and/or Director or Trustee of the Fund. This exemption does not apply
to those persons who are Officers and/or Directors of an Underwriter
or Adviser.
Sanctions
- ---------
a) Failure to comply with the preclearance process may result in any of
the following sanctions being imposed as deemed appropriate by the
Compliance Department:
i) a letter of censure;
ii) suspension;
iii) a fine;
iv) the unwinding of trades;
v) the disgorging of profits; or
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<PAGE>
vi) the termination of the employment of the violator.
b) (In instances where the violation is committed by a member of the
Access Person's household, any sanction would be imposed on the Access
Person.)
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<PAGE>
PERSONAL TRANSACTION NOTIFICATION
I, _________________________ intend to buy/sell shares of _________________ for
my personal account or an account for which I have discretion. I am aware of no
conflict this transaction may pose with any mutual fund managed by Federated
Investors or Federated Global Research.
Signed by: _______________________
Date: ____________________________
Acknowledged by: _________________
(Head Trader or Sr. VP)
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<PAGE>
Date
Broker-Dealer Name Address
RE: Your Name
Brokerage Account Number: 1234-5678
Dear Sir/Madam:
As a(n) [employee] [relative residing in the household of an employee] of
Federated Investors, I am subject to certain requirements applicable to my
personal securities transactions, in accordance with the Codes of Ethics
adopted by the various investment companies, investment advisers and
broker/dealers affiliated with Federated Investors. These requirements also
assist Federated Investors in carrying out its responsibilities under the
Insider Trading and Security Fraud Enforcement Act of 1988. Among these
requirements is my obligation to provide to Federated Investors duplicate
brokerage confirmations and account statements.
Therefore, I hereby request that you provide duplicate confirmations and
account statements with respect to securities in which I have any
beneficial ownership or interest, including securities held in street name
or in house, family, joint or partnership accounts. These duplicate account
memoranda should occur with respect to all transactions including, but not
limited to, those involving options, warrants, shares of closed end
investment companies and futures contracts. Please forward this information
to:
Brian P. Bouda
Chief Compliance Officer
Federated Investors, Inc.
Federated Investors Tower
Pittsburgh, PA 15222-3779
Any questions concerning these matters can be directed to Lisa Ling at
(412) 288-6399. Your serious attention to this matter is greatly
appreciated.
Sincerely,
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<PAGE>
PROCEDURES FOR THE REPORTING AND REVIEW OF PERSONAL
TRANSACTION ACTIVITY
Initial Reporting Process
- -------------------------
1. A member of the Compliance Department meets with each new Access Person and
reviews the Code of Ethics, the Insider Trading Policy and the procedures
for preclearing personal securities transactions through TradeComply.
2. The Access Person is required to complete the "Certification and
Acknowledgment Form" to acknowledge his/her understanding of the Code of
Ethics and return it to the designated Compliance Assistant within 10
calendar days.
3. In addition, the Access Person is required to complete the "Personal
Security Portfolio Form" which includes the following information:
a) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
b) the name and address of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered Security was
held for the direct or indirect benefit of the Access Person as of the
date of employment as an Access Person; and
c) the date the report is submitted to the Compliance Department.
4. A separate form must be completed for the Access Person and all household
members as defined in Section 2(c) of the Code. The signed form(s) must be
returned to the Compliance Department within 10 calendar days.
5. A member of the Compliance Department inputs current portfolio holdings
information into TradeComply as "initial" holdings.
6. The Compliance Department notifies each broker, dealer or bank that
duplicate confirmations and statements for the Access Person and household
members, if applicable, must be sent to Brian P. Bouda, Chief Compliance
Officer, effective immediately.
Quarterly Reporting Process
- ---------------------------
1. On the first business day after each calendar quarter end, the Compliance
Assistant sends an e-mail to each Access Person giving step-by-step
instructions on how to complete the quarterly reporting requirements using
TradeComply.
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<PAGE>
2. Within 10 calendar days of the quarter end, the Access Person is required
to:
a) review for accuracy all Covered Security transactions recorded during
the previous calendar quarter in all personal and household member
accounts;
b) review all open account information, including names of brokers, banks
and dealers, addresses and account numbers;
c) notify the Compliance Department of any new accounts established with
brokers, banks or dealers during the quarter and the date the account
was established;
d) resolve any discrepancies with the Compliance Department;
e) record an electronic signature on TradeComply.
3. Covered Security transactions executed by any Access Person during the
calendar quarter are reviewed by Lisa Ling, Compliance Officer,
periodically throughout the quarter using the Compliance Monitor function
in TradeComply.
4. The Compliance Department issues memos to each Access Person if any
transactions he or she has executed during the quarter have been deemed to
be either exceptions to or violations of the Code's requirements.
5. Based on the activity and the responses to the memos, the Compliance
Department may impose any of the sanctions identified in Section 8.
Annual Reporting Process
- ------------------------
1. At least annually, the Compliance Department requires that each Access
Person read the Code and certify and acknowledge his/her understanding of
the Code and its requirements.
2. This re-certification is required to be completed within 10 calendar days
of the request. The Compliance Department monitors compliance with this
requirement through the electronic signatures on TradeComply.
3. At the same time, the Compliance Department provides each Access Person
with a cur-rent list of securities held in the Access Person's account(s)
on TradeComply.
4. Within 10 calendar days of the request, the Access Person is required to:
a) review for accuracy all securities held in all personal and household
member accounts, including the title, number of shares and principal
amount of each Covered Security in which the Access Person had any
direct or indirect beneficial ownership;
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<PAGE>
b) review all open account information, including names of brokers, banks
and dealers, addresses and account numbers;
c) notify the Compliance Department of any new accounts established with
brokers, banks or dealers;
d) resolve any discrepancies with the Compliance Department;
e) record an electronic signature on TradeComply.
Reporting to the Board of Directors
- -----------------------------------
1. Each quarter, the Compliance Department reports any violations of the Code
to the Board of Directors. Violations of the Code include:
a) failure to preclear a transaction;
b) failure to complete the initial, quarterly or annual reporting
requirements timely, regardless of whether the Access Person executed
any transactions;
c) recognition of a profit on the sale of a security held less than 60
days;
d) failure to comply with the receipt of gifts requirements; and
e) any trends or patterns of personal securities trading which are deemed
by the Compliance Department to be violations of the Code.
2. The Compliance Department provides the Board with the name of the Access
Person; the type of violation; the details of the transaction(s); and the
types of sanctions imposed, if any.
Recordkeeping Requirements
- --------------------------
The Compliance Department maintains the following books and records in
TradeComply for a period no less than 6 calendar years:
a) a copy of the Code of Ethics;
b) a record of any violation of the Code of Ethics and any action taken
as a result of the violation;
c) a copy of each report made by an Access Person, including initial,
quarterly and annual reporting;
d) a record of all Access Persons (current and for the past five years);
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<PAGE>
e) a record of persons responsible for reviewing reports; and
f) a copy of any supporting documentation used in making decisions
regarding action taken by the Compliance Department with respect to
personal securities trading.
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