<PAGE>
[GRAPHIC]
Excelsior Money Market Funds
Institutional Shares
Prospectus
August 1, 2000
Excelsior Funds, Inc.
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.
[LOGO OF EXCELSIOR FUNDS]
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Table of Contents
Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals, strategies and
risks. 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 eas-
ily 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........................................................... 4
Government Money Fund................................................ 6
More Information About Risk.......................................... 8
More Information About Fund Investments.............................. 8
Investment Adviser................................................... 8
Purchasing, Selling and Exchanging Fund Shares....................... 9
Dividends and Distributions.......................................... 11
Taxes................................................................ 12
Financial Highlights................................................. 13
How to Obtain More Information About Excelsior Funds, Inc. .......... Back Cover
</TABLE>
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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, strategies and risks 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 man-
ager's judgments about the markets, the economy, or companies may not antici-
pate 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 Insur-
ance 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.
3
<PAGE>
Money Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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 de-
posit, 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 condi-
tions, 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
The prices of the Fund's fixed income securities respond to economic develop-
ments, 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 invest-
ment 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 cal-
culate how they will respond to changing interest rates.
4
<PAGE>
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Performance Information
Institutional Shares of the Fund have less than one calendar year's perfor-
mance. 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 an-
nual 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.
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
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 4.83%
Best Quarter Worst Quarter
2.33% 0.68%
(6/30/99) (12/31/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.83%.
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) 4.83% 5.16% 5.03%
</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> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.15%
Other Operating Expenses 0.22%
Total Other Expenses 0.37%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.62%
Fee Waivers and Expense Reimbursements (0.37)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.25%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.25%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in Institu-
tional 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 pe-
riod.
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 distribu-
tions. Although your actual costs 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> <C>
$26 $80 $141 $318
</TABLE>
5
<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 consis-
tent 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 qual-
ity U.S. dollar-denominated money market instruments, including mortgage-backed
securities, issued or guaranteed by the U.S. government, its agencies and in-
strumentalities and fully collateralized repurchase agreements. In managing the
Fund, the Adviser assesses current and projected market conditions, particu-
larly 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
The prices of the Fund's fixed income securities respond to economic develop-
ments, 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 invest-
ment 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 move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment 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 cal-
culate how they will respond to changing interest rates.
6
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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 Institu-
tional Shares and Shares would have substantially similar annual returns, be-
cause both share classes are invested in the same portfolio of securities. An-
nual returns will differ only to the extent that Institutional Shares and
Shares do not have the same expenses. In reviewing this performance informa-
tion, however, you should be aware that Shares have a 0.40% (annualized) Admin-
istrative Servicing Fee, while Institutional Shares have a 0.15% (annualized)
Administrative Servicing Fee.
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
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 4.82%
Best Quarter Worst Quarter
2.58% 0.67%
(12/31/95) (6/30/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.85%.
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) 4.82% 5.11% 4.94%
</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> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.15%
Other Operating Expenses 0.22%
Total Other Expenses 0.37%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.62%
Fee Waivers and Expense Reimbursements (0.37)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.25%*
</TABLE>
* The Adviser has contractually agreed to waive its fees and reimburse expenses
in order to keep total operating expenses from exceeding 0.25%, for the pe-
riod commencing on the date of this prospectus and ending March 31, 2001. For
more information about these fees, see "Investment Adviser."
Example
This Example is intended to help you compare the cost of investing in Institu-
tional 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 pe-
riod.
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 distribu-
tions. Although your actual costs 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> <C>
$26 $80 $141 $318
</TABLE>
7
<PAGE>
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More Information About Risk
Fixed Income Risk
(All Funds)--The market value of fixed income investments changes in response
to interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise. During
periods of rising interest rates, the values of outstanding fixed income secu-
rities generally fall. Moreover, while securities with longer maturities tend
to
produce higher yields, the prices of longer maturity securities are also sub-
ject to greater market fluctuations as a result of changes in interest rates.
Call Risk
(All Funds)--During periods of falling interest rates, certain debt obliga-
tions 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 fluc-
tuate, and may require a Fund to invest the resulting proceeds at lower in-
terest rates.
Credit Risk
(All Funds)--The possibility that an issuer will be unable to make timely
payments of either principal or interest.
Event Risk
(All Funds)--Securities may suffer declines in credit quality and market
value due to issuer restructurings or other factors. This risk should be re-
duced because of the Fund's multiple holdings.
Mortgage-Backed Securities
(All Funds)--Mortgage-backed securities are fixed income securities represent-
ing 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 un-
derlying 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 secu-
rity. Rising interest rates tend to discourage refinancings, with the result
that the average life and volatility of the security will increase, exa-
cerbating 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.
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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its principal sub-
sidiary Charles Schwab & Co., Inc., Schwab is one of the nation's largest fi-
nancial services firms and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets.
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 manage-
ment, 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.
8
<PAGE>
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The Adviser makes investment decisions for each Fund and continuously reviews,
supervises and administers each Fund's investment program.
U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the security subject to research.
The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and es-
tablishes 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 0.14%
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 ac-
count and set up procedures for placing transactions call (800) 881-9358 (from
overseas, call (617) 557-8280). Customers of financial institutions should con-
tact 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) 881-9358 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to Ex-
celsior 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:
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 en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.
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 proce-
dures. Your broker or institution may charge a fee for its services, in addi-
tion 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 deal-
ers, 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 mer-
chandise, 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.
9
<PAGE>
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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"). Presently, the only
Business Days on which the Adviser is closed and the NYSE is open are Veteran's
Day and Columbus 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 or-
der. 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 (including receipt of federal
funds (readily available funds)).
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 port-
folio 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 ac-
counts. If you have questions, call (800) 881-9358 (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 ac-
count number and sign the request.
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness Day by contacting a Fund directly by telephone at (800) 881-9358 (from
overseas, call (617) 557-8280). Shares will not be redeemed by the Fund unless
all required documents have been received 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).
If you own your shares directly and previously indicated on your account appli-
cation 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) 881-9358 (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 re-
ceives your request in good order.
Receiving Your Money
Normally, we will send your sale proceeds the next Business Day after we re-
ceive 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).
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
10
<PAGE>
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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 redemp-
tion.
Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be re-
quired 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 trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed. More information about this is in our Statement of Additional Informa-
tion.
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. We may
also reject any exchange request if we determine that such exchange would not
be in the best interests of a Fund or its shareholders. Shares can be exchanged
directly by mail, or by telephone if you previously selected the telephone ex-
change 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 in-
structions, 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 pur-
chase, 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 trans-
mitting requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay an administrative 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 organiza-
tion.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying accu-
mulated 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 af-
filiates 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.
11
<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 Funds will be taxable as
ordinary income. You will be subject to income tax on Fund distributions re-
gardless 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 se-
curities.
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 nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, 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 situa-
tion.
More information about taxes is in the Statement of Additional Information.
12
<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 sin-
gle 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
Ernst & Young LLP, independent auditors. Their report, along with each Fund's
financial statements, are incorporated by reference into our Statement of Addi-
tional Information. You can obtain the annual report, which contains more per-
formance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8280).
MONEY FUND
<TABLE>
<CAPTION>
Period Ended March 31, 2000/1/
------------------------------
<S> <C>
Net Asset Value, Beginning of Year.............. $ 1.00
--------
Income From Investment Operations
Net Investment Income.......................... 0.01688
Net Gains on Securities (both realized and
unrealized)................................... --
--------
Total From Investment Operations............... 0.01688
--------
Less Distributions
Dividends From Net Investment Income........... (0.01688)
Dividends in Excess of Net Investment Income... --
--------
Total Distributions............................ (0.01688)
--------
Net Asset Value, End of Year.................... $ 1.00
========
Total Return.................................... 1.70%
Ratios/Supplemental Data
Net Assets, End of Period (in millions)........ $ 273.00
Ratio of Net Operating Expenses to Average Net
Assets........................................ 0.25%
Ratio of Gross Operating Expenses to Average
Net Assets/2.............................../.. 0.49%
Ratio of Net Investment Income to Average Net
Assets........................................ 5.72%
</TABLE>
------
Notes:
1. Inception date of this class of shares was December 16, 1999.
2. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
13
<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 fol-
lowing:
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) 881-9358 (from overseas, call (617) 557-8280)
By Mail: Excelsior Funds, 73 Tremont Street, Boston, Massachusetts 02108-3913
By Internet: http://www.excelsiorfunds.com
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual re-
ports, 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 re-
quest documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section, Wash-
ington, 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>
[GRAPHIC]
Excelsior Money Market Funds
Prospectus
August 1, 2000
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
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.
[LOGO OF EXCELSIOR FUNDS]
<PAGE>
-----------------------------------------------------------------
Table Of Contents
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. are mutual fund fam-
ilies that offer shares in separate investment portfolios which have individual
investment goals, strategies and risks. This prospectus gives you important in-
formation about the Money, Government Money and Treasury Money Funds of Excel-
sior 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 Govern-
ment 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 eas-
ily 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........................................................... 4
Government Money Fund................................................ 6
Treasury Money Fund.................................................. 8
Tax-Exempt Money Fund................................................ 10
New York Tax-Exempt Money Fund....................................... 12
More Information About Risk.......................................... 14
More Information About Fund Investments.............................. 14
Investment Adviser................................................... 14
Purchasing, Selling and Exchanging Fund Shares....................... 15
Dividends and Distributions.......................................... 18
Taxes................................................................ 18
Financial Highlights................................................. 20
How to Obtain More Information About Excelsior Funds, Inc. .......... Back Cover
</TABLE>
<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, strategies and risks 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 man-
ager's judgments about the markets, the economy, or companies may not antici-
pate 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 invest-
ment 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 In-
surance 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.
3
<PAGE>
Money Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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 de-
posit, 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 condi-
tions, 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
The prices of the Fund's fixed income securities respond to economic develop-
ments, 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 invest-
ment 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 cal-
culate how they will respond to changing interest rates.
4
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
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 4.83%
Best Quarter Worst Quarter
2.01% 0.68%
(6/30/90) (12/31/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.83%.
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) 4.83% 5.16% 5.03%
</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.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.22%
Total Other Expenses 0.62%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.87%
Fee Waivers and Expense Reimbursements (0.37)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$51 $160 $280 $628
</TABLE>
5
<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 consis-
tent 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 qual-
ity U.S. dollar-denominated money market instruments, including mortgage-backed
securities, issued or guaranteed by the U.S. government, its agencies and in-
strumentalities and fully collateralized repurchase agreements. In managing the
Fund, the Adviser assesses current and projected market conditions, particu-
larly 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
The prices of the Fund's fixed income securities respond to economic develop-
ments, 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 invest-
ment 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 move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment 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 cal-
culate how they will respond to changing interest rates.
6
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
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 4.82%
Best Quarter Worst Quarter
2.58% 0.67%
(12/31/95) (6/30/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.85%.
This table shows the average annual total returns of the Fund's shares for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 5 10
Year Years Years
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Fund (Shares) 4.82% 5.11% 4.94%
</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.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.22%
Total Other Expenses 0.62%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.87%
Fee Waivers and Expense Reimbursements (0.37)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$51 $161 $280 $628
</TABLE>
7
<PAGE>
Treasury Money Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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. Trea-
sury obligations. The Fund also may invest, to a lesser extent, in high quality
obligations issued or guaranteed by U.S. government agencies and instrumentali-
ties. Generally, interest payments on obligations held by the Fund will be ex-
empt 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 re-
spond 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
The prices of the Fund's fixed income securities respond to economic develop-
ments, 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 inter-
est 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 invest-
ment 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 move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment 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.
8
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1992 3.68%
1993 2.66%
1994 3.61%
1995 5.27%
1996 4.81%
1997 4.89%
1998 4.82%
1999 4.41%
Best Quarter Worst Quarter
1.37% 0.63%
(6/30/91) (6/30/93)
The Fund's performance for the six month period ending June 30, 2000 was 2.56%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1
Year 5 Years Since Inception
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Money Fund 4.41% 4.84% 4.37%*
</TABLE>
* Since February 13, 1991
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.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.30%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.21%
Total Other Expenses 0.61%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.91%
Fee Waivers and Expense Reimbursements (0.36)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.55%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.55%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$56 $176 $307 $689
</TABLE>
9
<PAGE>
Tax-Exempt Money Fund
-----------------------------------------------------------------
FUND SUMMARY
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
Investment Objective
The Tax-Exempt Money Fund seeks a moderate level of current interest income ex-
empt 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 qual-
ity money market instruments issued by state and local governments and agen-
cies, and other U.S. territories and possessions, that pay interest exempt from
federal taxes ("municipal money market instruments"). Banks and other credit-
worthy entities may provide letters of credit and other credit enhancements as
to municipal money market instruments. Such institutions may also provide li-
quidity 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.
In managing the Fund, the Adviser assesses current and projected market condi-
tions, particularly interest rates. Based on this assessment and an extensive
credit analysis, the Adviser uses gradual shifts in portfolio maturity to re-
spond to expected changes in interest rates and selects securities that it be-
lieves 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 develop-
ments, 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 invest-
ment 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 securi-
ties. 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.
10
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1990 5.56%
1991 4.34%
1992 3.02%
1993 1.98%
1994 2.46%
1995 3.53%
1996 3.11%
1997 3.25%
1998 3.09%
1999 2.78%
Best Quarter Worst Quarter
1.39% 0.47%
(12/31/90) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 1.73%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1 5 10
Year Years Years
----------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Fund 2.78% 3.15% 3.28%
</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.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.21%
Total Other Expenses 0.61%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.86%
Fee Waivers and Expense Reimbursements (0.36)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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>
$51 $160 $280 $628
</TABLE>
11
<PAGE>
New York Tax-Exempt Money Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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 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 instru-
ments"). Banks and other creditworthy entities may provide letters of credit
and other credit enhancements for New York money market instruments. Such in-
stitutions may also provide liquidity facilities that shorten the effective ma-
turity 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 pres-
ent 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 condi-
tions, particularly interest rates. Based on this assessment and an extensive
credit analysis, the Adviser uses gradual shifts in portfolio maturity to re-
spond to expected changes and selects securities that it believes offer the
most attractive risk/return trade off.
Principal Risks of Investing in the New York Tax-Exempt Money Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, 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 invest-
ment 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 securi-
ties. 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 ad-
12
<PAGE>
-------------------------------------------------------------
verse 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 obliga-
tions. 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
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1999 2.66%
Best Quarter Worst Quarter
0.75% 0.59%
(12/31/99) (3/31/99)
The Fund's performance for the six month period ending June 30, 2000 was 1.64%.
This table shows the Fund's average annual total returns for the periods ended
December 31, 1999.
<TABLE>
<CAPTION>
1
Year Since Inception
-----------------------------------------------------
<S> <C> <C>
New York Tax-Exempt Money Fund 2.66% 2.68%*
</TABLE>
* Since August 3, 1998.
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.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.50%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.20%
Total Other Expenses 0.60%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.10%
Fee Waivers and Expense Reimbursements (0.50)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.60%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.60%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$61 $192 $335 $750
</TABLE>
13
<PAGE>
-------------------------------------------------------------
More Information About Risk
Fixed Income Risk
(All Funds)--The market value of fixed income 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. During
periods of rising interest rates, the values of outstanding fixed income secu-
rities will generally fall. 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
(All Funds)--During periods of falling interest rates, certain debt obliga-
tions 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 fluc-
tuate, and may require a Fund to invest the resulting proceeds at lower in-
terest rates.
Credit Risk
(All Funds)--The possibility that an issuer will be unable to make timely
payments of either principal or interest.
Event Risk
(All Funds)--Securities may suffer declines in credit quality and market
value due to issuer restructurings or other factors. This risk should be re-
duced because of the Fund's multiple holdings.
Municipal Issuer Risk
(Tax-Exempt Money Fund, New York Tax-Exempt Money 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 to the
financial condition or credit rating of municipal issuers may also adversely
affect the value of the Funds' municipal securities. Constitutional or legisla-
tive limits 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.
(New York Tax-Exempt Money Fund)--In addition, the Fund's concentration of in-
vestments in 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 numer-
ous states.
Mortgage-Backed Securities
(Money Fund, Government Money Fund)--Mortgage-backed securities are fixed in-
come 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 possi-
bility 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 secu-
rity 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.
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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its prin-
14
<PAGE>
-------------------------------------------------------------
cipal subsidiary Charles Schwab & Co., Inc., Schwab is one of the nation's
largest financial services firms and the nation's largest electronic brokerage
firm, in each case measured by customer assets. At December 31, 1999, Schwab
served 6.6 million active accounts with $725 billion in customer assets.
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 manage-
ment, 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.
U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the security subject to research.
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 0.14%
Government Money Fund 0.22%
Treasury Money Fund 0.28%
Tax-Exempt Money Fund 0.18%
New York Tax-Exempt Money Fund 0.32%
</TABLE>
Purchasing, Selling and Exchanging Fund Shares
This section tells you how to buy, sell (sometimes called "redeem") and ex-
change 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 Ex-
celsior 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 in-
vestment 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 en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place
15
<PAGE>
-------------------------------------------------------------
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 deal-
ers, 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 mer-
chandise, 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"). Presently, the only Busi-
ness Days on which the Adviser is closed and the NYSE is open are Veterans' Day
and Columbus 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 or-
der. 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 divi-
dends 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.
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 port-
folio 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 pur-
chase 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 in-
vestments 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,
. 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).
16
<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 ac-
count number and sign the request.
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness 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. Shares will not be redeemed by the Fund unless all required documents
have been received by the Fund.
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 institu-
tion 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).
If you own your shares directly and previously indicated on your account appli-
cation 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 re-
ceives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic with-
drawal 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).
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 re-
quired 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 trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed. More information about this is in our Statement of Additional Informa-
tion.
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
certain portfolios of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year. We may
also reject any exchange request if we determine that the
17
<PAGE>
-------------------------------------------------------------
exchange would not be in the best interests of a Fund or its shareholders.
Shares can be exchanged directly by mail, or by telephone if you previously se-
lected the telephone exchange option on the account application.
You may also exchange shares through your financial institution. Exchange re-
quests 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 in-
structions, 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 pur-
chase, 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 trans-
mitting requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay an administrative 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 organiza-
tion.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying accu-
mulated 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 af-
filiates 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 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' invest-
ments, that a portion of these Funds' distributions could be taxable to share-
holders 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.
18
<PAGE>
-------------------------------------------------------------
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 rail-
road 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.
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 dis-
tributions, 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 nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, 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 situa-
tion.
More information about taxes is in the Statement of Additional Information.
19
<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 sin-
gle 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
Ernst & Young LLP, independent auditors. Their report, along with each Fund's
financial statements, are incorporated by reference into our Statement of Addi-
tional Information. You can obtain the annual report, which contains more per-
formance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8280).
Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.05005 0.04901 0.05139 0.04888 0.05336
Net Gains on Securities
(both realized and
unrealized)........... 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.05005 0.04901 0.05139 0.04888 0.05336
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.05005) (0.04901) (0.05139) (0.04888) (0.05336)
Dividends in Excess of
Net Investment
Income................ 0.00000 0.00000/2/ 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.05005) (0.04901) (0.05139) (0.04888) (0.05336)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 5.08% 5.01% 5.26% 5.00% 5.47%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $1,467.18 $ 973.67 $ 658.87 $ 498.07 $ 394.29
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.47% 0.48% 0.48% 0.47% 0.50%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.58% 0.52% 0.52% 0.53% 0.53%
Ratio of Net Investment
Income to Average Net
Assets................ 5.05% 4.85% 5.14% 4.89% 5.40%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
20
<PAGE>
-----------------------------------------------------------------
Government Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.05004 0.04838 0.05082 0.04862 0.05296
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.05004 0.04838 0.05082 0.04862 0.05296
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.05004) (0.04838) (0.05082) (0.04862) (0.05296)
Dividends in Excess of
Net Investment
Income................ 0.00000 0.00000/2/ 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.05004) (0.04838) (0.05082) (0.04862) (0.05296)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 5.08% 4.95% 5.20% 4.97% 5.43%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $ 772.69 $ 641.83 $ 600.12 $ 533.83 $ 461.47
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.47% 0.47% 0.47% 0.47% 0.50%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.50% 0.50% 0.50% 0.51% 0.53%
Ratio of Net Investment
Income to Average Net
Assets................ 5.01% 4.85% 5.09% 4.86% 5.36%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
21
<PAGE>
-----------------------------------------------------------------
Treasury Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.04560 0.04543 0.04853 0.04676 0.05043
Net Gains on Securities
(both realized and
unrealized)........... 0.00000 0.00002 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.04560 0.04545 0.04853 0.04676 0.05043
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.04560) (0.04545) (0.04853) (0.04676) (0.05043)
Dividends in Excess of
Net Investment
Income................ 0.00000 0.00000 0.00000/2/ 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.04560) (0.04545) (0.04853) (0.04676) (0.05043)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 4.62% 4.64% 4.96% 4.78% 5.16%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $ 525.39 $ 494.22 $ 469.64 $ 349.09 $ 258.17
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.51% 0.52% 0.52% 0.52% 0.55%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.53% 0.55% 0.54% 0.54% 0.57%
Ratio of Net Investment
Income to Average Net
Assets................ 4.58% 4.55% 4.86% 4.68% 5.03%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.00001 per share.
22
<PAGE>
-----------------------------------------------------------------
Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income.. 0.02946 0.02911 0.03216 0.03050 0.03362
Net Gains on Securities
(both realized and
unrealized)........... (0.00001) 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total From Investment
Operations............ 0.02945 0.02911 0.03216 0.03050 0.03362
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.02945) (0.02910) (0.03216) (0.03050) (0.03362)
Dividends in Excess of
Net Investment
Income................ 0.00000 (0.00001) 0.00000 0.00000 0.00000
--------- --------- --------- --------- ---------
Total Distributions.... (0.02945) (0.02911) (0.03216) (0.03050) (0.03362)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 2.96% 2.95% 3.26% 3.09% 3.41%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $2,051.11 $1,503.07 $1,396.53 $1,069.69 $ 966.71
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.46% 0.46% 0.47% 0.47% 0.49%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/
...................... 0.52% 0.52% 0.53% 0.52% 0.53%
Ratio of Net Investment
Income to Average Net
Assets................ 2.97% 2.91% 3.21% 3.05% 3.35%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
23
<PAGE>
-----------------------------------------------------------------
New York Tax-Exempt Money Fund
<TABLE>
<CAPTION>
Year Ended March 31, 2000 Period Ended March 31, 1999/1/
------------------------- ------------------------------
<S> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00
--------- ---------
Income From Investment
Operations
Net Investment Income.. 0.02809 0.01711
--------- ---------
Total From Investment
Operations............ 0.02809 0.01711
--------- ---------
Less Distributions
Dividends From Net
Investment Income..... (0.02809) (0.01711)
--------- ---------
Total Distributions.... (0.02809) (0.01711)
--------- ---------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00
========= =========
Total Return............ 2.82% 1.72%/3/
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $ 421.39 $ 305.72
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.54% 0.47%/2/
Ratio of Gross
Operating Expenses to
Average Net Assets/3/
...................... 0.71% 0.79%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 2.84% 2.24%/2/
</TABLE>
------
Notes:
1. Inception date of the Fund was August 3, 1998.
2. Annualized.
3. Not Annualized.
24
<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 fol-
lowing:
Statement of Additional Information (SAI)
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
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual re-
ports, 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 Pub-
lic 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 Ex-
change 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>
Excelsior Domestic Equity Funds
Prospectus
August 1, 2000
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
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.
[LOGO OF EXCELSIOR FUNDS]
<PAGE>
Table of Contents
Excelsior Funds, Inc. and Excelsior Institutional Trust are mutual fund fami-
lies that offer shares in separate investment portfolios which have individual
investment goals, strategies and risks. This prospectus gives you important in-
formation about the Blended Equity, Large Cap Growth, Small Cap, Value and Re-
structuring, Energy and Natural Resources, Real Estate and Technology Funds of
Excelsior Funds, Inc. and the Optimum Growth and Value Equity Funds of Excel-
sior 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 of-
fered in a separate prospectus. Please read this prospectus and keep it for fu-
ture reference.
This prospectus has been arranged into different sections so that you can eas-
ily 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>
Blended Equity Fund.................................................. 4
Large Cap Growth Fund................................................ 6
Optimum Growth Fund.................................................. 8
Small Cap Fund....................................................... 10
Value And Restructuring Fund......................................... 12
Value Equity Fund.................................................... 14
Energy And Natural Resources Fund.................................... 16
Real Estate Fund..................................................... 18
Technology Fund...................................................... 20
More Information About Risk.......................................... 22
More Information About Fund Investments.............................. 23
Investment Adviser................................................... 23
Portfolio Managers................................................... 24
Purchasing, Selling And Exchanging Fund Shares....................... 24
Distribution Of Fund Shares.......................................... 27
Dividends And Distributions.......................................... 27
Taxes................................................................ 28
Financial Highlights................................................. 29
How to Obtain More Information About Excelsior Funds................. Back Cover
</TABLE>
<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, strategies and risks 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 man-
ager's judgments about the markets, the economy, or companies may not antici-
pate 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 invest-
ment 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 Insur-
ance Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the se-
curities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price move-
ments, 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 invest-
ment strategies, value and growth. These strategies are combined with "longer-
term investment themes" to assess the investment potential of individual compa-
nies. 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 val-
ues may be found in a company's future earnings potential or in its existing
resources and assets. Accordingly, the Adviser is constantly engaged in as-
sessing, comparing and judging the worth of companies, particularly in com-
parison 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 domi-
nate their markets by being low-cost, high-quality producers of products or
services. Usually these companies have an identifiable competitive advan-
tage. 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-av-
erage 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 identify investment opportunities. These longer-term
themes are strong and inexorable trends arising from time to time from eco-
nomic, social, demographic and cultural forces. The Adviser also believes
that understanding the instigation, catalysts and effects of these long-term
trends will enable it to identify companies that are currently or will soon
benefit from these trends.
3
<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 Ad-
viser believes have value that is not currently reflected in their market pric-
es. 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 iden-
tify companies with characteristics that will lead to future earnings growth or
recognition of their true value. The Adviser looks for companies that are posi-
tioned to provide solutions to or benefit from complex social and economic
trends, or whose products are early in their life cycle and will experience ac-
celerating growth in the future. In addition, the Adviser invests a smaller
portion of the Fund's assets in a quantitatively selected segment of large cap-
italization 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 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.
4
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
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 22.74%
Best Quarter Worst Quarter
22.44% (19.21)%
(12/31/98) (9/30/90)
The Fund's performance for the six month period ending June 30, 2000 was 3.30%.
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>
5 10
1 Year Years Years
-----------------------------------------------------------------------
<S> <C> <C> <C>
Blended Equity Fund 22.74% 25.93% 17.64%
Standard & Poor's 500 Composite Stock Price Index 21.04% 28.54% 18.20%
</TABLE>
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.75%**
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.21%
Total Other Expenses 0.61%
-----------------------------------------------------
Total Annual Fund Operating
Expenses 1.36%
Fee Waivers and Expense Reimbursements (0.31)%
-----------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.05%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser" and "Distribution of
Fund Shares."
** The investment advisory fee for this Fund was reduced as of August 1, 2000
from a flat fee of 0.75% of average daily net assets to the following: 0.75%
of average daily net assets of the first $1 billion of assets; 0.70% of the
next $500 million of average daily net assets; and 0.65% of average daily
net assets over $1.5 billion.
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 distribu-
tions. Although your actual costs 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> <C>
$107 $334 $579 $1,283
</TABLE>
5
<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 invest-
ing 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 bil-
lion that the Adviser believes have above-average growth prospects.
The Adviser takes a long-term approach to managing the Fund and invests in com-
panies 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 bene-
fit 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 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.
6
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1998 67.04%
1999 47.47%
Best Quarter Worst Quarter
39.37% (9.28)%
(12/31/98) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was 2.92%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 1000 Growth Index.
<TABLE>
<CAPTION>
1 Since
Year Inception
----------------------------------------------------------------------------------------------
<S> <C> <C>
Large Cap Growth Fund 47.47% 50.22%*
Russell 1000 Growth Index 33.14% 32.20%**
</TABLE>
* 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 par-
ticular 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 0.75%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.26%
Total Other Expenses 0.66%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.41%
Fee Waivers and Expense Reimbursements (0.36)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.05%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$107 $334 $579 $1,283
</TABLE>
7
<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 com-
mon 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.
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 mar-
kets 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."
8
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1997 33.08%
1998 64.66%
1999 44.26%
Best Quarter Worst Quarter
36.33% (6.08)%
(12/31/98) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was 1.29%.
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.
<TABLE>
<CAPTION>
Since
1 Year Inception
--------------------------------------------------------------------------------------------
<S> <C> <C>
Optimum Growth Fund (Shares) 44.26% 39.41%*
Russell 1000 Growth Index 33.14% 31.25%**
</TABLE>
* Since June 1, 1996
** Since May 31, 1996
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.65%
Distribution (12b-1) Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.31%
Total Other Expenses 0.71%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.61%
Fee Waivers and Expense Reimbursements (0.56)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.05%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 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> <C>
$107 $334 $579 $1,283
</TABLE>
9
<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 se-
curities of smaller U.S.-based companies that are in the early stages of devel-
opment 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 invest-
ment 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 con-
siders, 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 se-curities issued by such companies may suffer a
decline in response. These fac-tors 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 ex-
change.
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.
10
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1993 27.91%
1994 5.30%
1995 22.81%
1996 -2.30%
1997 14.21%
1998 -12.38%
1999 29.71%
Best Quarter Worst Quarter
25.80% (24.77)%
(12/31/99) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was
20.95%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 2000 Index.
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Fund 29.71% 9.26% 11.17%*
Russell 2000 Index 21.26% 16.70% 14.16%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.60%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.32%
Total Other Expenses 0.72%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.32%
Fee Waivers and Expense Reimbursements (0.27)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.05%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$107 $334 $579 $1,283
</TABLE>
11
<PAGE>
Value and Restructuring 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 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 in-
vesting in companies which will benefit from their restructuring or redeploy-
ment of assets and operations in order to become more competitive or profit-
able.
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 re-
structuring activities, such as consolidations, outsourcing, spin-offs or reor-
ganizations, will offer significant value to the issuer and increase its in-
vestment 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 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 ex-
change.
The Fund also may be subject to risks particular to its investments in foreign
and medium capitalization companies. These risks are discussed in greater de-
tail 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.
12
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1993 39.95%
1994 2.60%
1995 38.80%
1996 25.05%
1997 33.56%
1998 10.32%
1999 41.97%
Best Quarter Worst Quarter
28.03% (20.46)%
(12/31/99) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was
(0.65)%.
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.
<TABLE>
<CAPTION>
5 Since
1 Year Years Inception
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value and Restructuring Fund 41.97% 29.42% 26.61%*
Russell 1000 Value Index 7.34% 23.07% 18.44%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.60%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.36%
Total Other Expenses 0.76%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.36%
Fee Waivers and Expense Reimbursements (0.31)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.05%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$107 $334 $579 $1,283
</TABLE>
13
<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 be-
lieves are undervalued at current market prices. The Adviser generally diversi-
fies the Fund's investments over a variety of industries and the Fund may in-
vest in companies of any size, including small, high growth companies.
In selecting investments for the Fund, the Adviser combines fundamental re-
search with valuation constraints to identify companies trading at what the Ad-
viser 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 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 ex-
change.
The Fund also may be subject to risks particular to its investments in foreign
and medium capitalization companies. These risks are discussed in greater de-
tail 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.
14
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1997 27.31%
1998 20.11%
1999 34.44%
Best Quarter Worst Quarter
26.76% (16.39)%
(12/31/99) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was
(2.00)%.
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
and the Russell Mid Cap Value Index.
<TABLE>
<CAPTION>
Since
1 Year Inception
--------------------------------------------------
<S> <C> <C>
Value Equity Fund (Shares) 34.44% 27.36%*
Russell 1000 Value Index** 7.34% 19.62%***
Russell Mid Cap Value Index ** (0.11)% 13.56%***
</TABLE>
* Since June 1, 1996
** The Russell 1000 Value Index measures the performance of the 1,000 largest
U.S. companies based on total market capitalization, with lower price-to-
book ratios and lower forecasted growth values. The Russell Mid Cap Value
Index measures the performance of medium-sized, value-oriented securities.
The Indexes are unmanaged and do not reflect any fees or expenses.
*** Since May 31, 1996
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.65%
Distribution (12b-1) Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.30%
Total Other Expenses 0.70%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.60%
Fee Waivers and Expense Reimbursements (0.55)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.05%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$107 $334 $579 $1,283
</TABLE>
15
<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 re-
sources groups of industries. The Fund may also invest, to a more limited ex-
tent, 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 en-
ergy 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 earn-
ings 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, ad-
verse 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 po-
litical events (such as coups or military confrontations) can affect the over-
all 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
16
<PAGE>
-------------------------------------------------------------
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 in-
vestments in those securities.
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1993 14.69%
1994 -2.70%
1995 20.11%
1996 38.38%
1997 18.31%
1998 -15.87%
1999 27.40%
Best Quarter Worst Quarter
20.04% (13.83)%
(9/30/97) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was
25.49%.
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>
Since
1 Year 5 Years Inception
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy and Natural Resources
Fund 27.40% 16.08% 13.00%*
Standard & Poor's 500
Composite Stock Price Index 21.04% 28.54% 21.52%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.60%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.37%
Total Other Expenses 0.77%
------------------------------------------------------
Total Annual Fund Operating
Expenses 1.37%
Fee Waivers and Expense Reimbursements (0.12)%
------------------------------------------------------
Net Annual Fund Operating
Expenses 1.25%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.25%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 10
Year 3 Years 5 Years Years
--------------------------------
<S> <C> <C> <C> <C>
$127 $397 $686 $1,511
</TABLE>
17
<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 en-
gaged in the real estate business. This objective may be changed without share-
holder 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 pro-
ducing investments. The Fund also invests in other issuers engaged in the real
estate business, such as developers, mortgage lenders and servicers, construc-
tion companies and building material suppliers.
The Adviser takes a long-term approach to managing the Fund and seeks to iden-
tify 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 under-
lying 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 es-
tate 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 concen-
trated in issuers conducting business in the same industry, the Fund is subject
to legislative or regulatory changes, adverse market conditions and/or in-
creased competition affecting that industry.
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 en-
gaged 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.
18
<PAGE>
-------------------------------------------------------------
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 in-
vestments in those securities.
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPH]
1998 -13.55%
1999 -7.30%
Best Quarter Worst Quarter
10.79% (8.87)%
(6/30/99) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was
12.91%.
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.
<TABLE>
<CAPTION>
Since
1 Year Inception
---------------------------------------------
<S> <C> <C>
Real Estate Fund (7.30)% (8.02)%*
Morgan Stanley REIT Index (4.55)% (9.39)%**
</TABLE>
* 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 par-
ticular 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 1.00%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.32%
Total Other Expenses 0.72%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.72%
Fee Waivers and Expense Reimbursements (0.52)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.20%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.20%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 10
Year 3 Years 5 Years Years
--------------------------------
<S> <C> <C> <C> <C>
$122 $381 $660 $1,455
</TABLE>
19
<PAGE>
Technology Fund
-----------------------------------------------------------------
FUND SUMMARY
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
Investment Objective
The Technology Fund seeks superior, long-term growth of capital. This objective
may be changed without shareholder approval.
Investment Strategy of the Technology Fund
The Fund seeks to achieve its objective by investing in companies engaged in
the innovation, development or advancement of technology and whose long-term
growth prospects, in the Adviser's opinion, appear to exceed the overall mar-
ket. These companies may be in a variety of industries, and may include com-
puter hardware, software, electronic components and systems, telecommunica-
tions, internet, biotechnology, media and information services companies or
other companies that use technology extensively in the development of new or
improved products or processes. 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 compa-
nies 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-av-
erage 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 tech-
nology 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 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 compa-
nies may experience dramatic price movements that have little or no basis in
fundamental economic conditions. As a result, the Fund's investment in technol-
ogy companies may subject it to more volatile price movements than a more di-
versified 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 se-
curities may fluctuate substantially from day-to-day. Individual companies may
report poor results or be
20
<PAGE>
-------------------------------------------------------------
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 in-
vestments 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.
Fund Fees and Expenses
Every mutual fund has operating expenses to pay for services such as profes-
sional 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)
<TABLE>
<S> <C> <C>
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%*
</TABLE>
* 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 cur-
rent fiscal year. The Adviser has contractually agreed to waive its invest-
ment advisory fee or other fees until March 31, 2001, in an amount equal to
the administrative servicing fee paid by the Fund. Accordingly, Net Annual
Fund 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 distribu-
tions. Although your actual costs and returns might be different, your approxi-
mate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 Year 3 Years
-------------------
<S> <C> <C>
$127 $397
</TABLE>
21
<PAGE>
-------------------------------------------------------------
More Information About Risk
Equity Risk
(All Funds)--Equity securities include public and privately issued equity secu-
rities, 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 gen-
eral are subject to market risks that may cause their prices to fluctuate over
time. The value of securities convertible into equity securities, such as war-
rants or convertible debt, is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision.
Small Cap Risk
(Blended Equity Fund, Large Cap Growth Fund, Small Cap Fund, Value and Restruc-
turing Fund, Value Equity Fund, Energy and Natural Resources Fund and Technol-
ogy Fund)--The smaller capitalization companies in which the Funds may invest
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 rela-
tively small management group. Therefore, small cap stocks may be more volatile
than those of larger companies.
Mid Cap Risk
(Blended Equity Fund, Optimum Growth Fund, Value and Restructuring Fund, Value
Equity Fund, Energy and Natural Resources Fund and Technology Fund)--The medium
capitalization companies that the Funds may invest in may be more vulnerable to
adverse business or economic events than larger companies. In particular, these
companies may have limited product lines, markets and financial resources, and
may depend on a relatively small management group. Therefore, medium capital-
ization stocks may be more volatile than those of larger companies.
Mortgage-Backed Securities
(Real Estate Fund)--Mortgage-backed securities are fixed income securities rep-
resenting an interest in a pool of underlying mortgage loans. They are sensi-
tive 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 de-
crease in market price. When interest rates fall, however, mortgage-backed se-
curities may not gain as much in market value because of the expectation of ad-
ditional 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 volatil-
ity risk of that portfolio.
Technology Risk
(Blended Equity Fund, Large Cap Growth Fund, Optimum Growth Fund, Small Cap
Fund, Value and Restructuring Fund, Value Equity Fund and Technology Fund)--The
Funds may invest in securities of issuers engaged in the technology sector of
the economy. These securities may underperform stocks of other issuers or the
market as a whole. To the extent that the Funds invest in issuers conducting
business in the technology market sector, the Funds are subject 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 sell-
ing 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 manufac-
turers, and may experience difficulties in managing growth. In addition, secu-
rities 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
(All Funds)--Investments in 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 appropria-
tion, could affect investments in foreign countries. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets. In ad-
dition, the value of securities denominated in foreign currencies, and of divi-
dends from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign companies or govern-
ments 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
22
<PAGE>
-------------------------------------------------------------
arrangements of similar U.S. securities. Some foreign governments levy with-
holding 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.
Currency Risk
(All Funds)--Investments in foreign securities denominated in foreign curren-
cies 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.
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 condi-
tions, 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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its principal sub-
sidiary Charles Schwab & Co., Inc., Schwab is one of the nation's largest fi-
nancial services firms and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets.
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 manage-
ment, 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.
U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the security subject to research.
23
<PAGE>
-------------------------------------------------------------
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:
<TABLE>
<S> <C>
Blended Equity Fund 0.70%
Large Cap Growth Fund 0.69%
Optimum Growth Fund 0.52%
Small Cap Fund 0.48%
Value and Restructuring Fund 0.50%
Value Equity Fund 0.50%
Energy and Natural Resources Fund 0.51%
Real Estate Fund 0.79%
Technology Fund 1.00%*
</TABLE>
-----
* 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 portfo-
lio 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.
Timothy Pettee, Margaret Doyle and Todd Herget serve as the Small Cap Fund's
portfolio co-managers. 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 Senior 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 Salomon Broth-
ers, Inc. in New York. Todd Herget, a Vice President in U.S. Trust's equity re-
search division has been with U.S. Trust since 1998. Mr. Herget is responsible
for the Fund's investments in the healthcare sector. Mr. Herget was previously
a cardiac research assistant with the Westchester County Medical Center. Mr.
Pettee, Ms. Doyle and Mr. Herget are primarily responsible for the day to day
management of the Small Cap Fund's portfolio. Research, analyses, trade execu-
tion 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,
Value Equity and the Technology Fund are made by a committee of investment pro-
fessionals and no persons are primarily responsible for making recommendations
to that committee. United States Trust Company of New York provides its invest-
ment 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 portfo-
lio 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 Re-
search 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
24
<PAGE>
-------------------------------------------------------------
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 Ex-
celsior 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 in-
vestment 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 en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.
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 proce-
dures, 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 corre-
spondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for deal-
ers, 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 mer-
chandise, 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"). Presently, the only Busi-
ness Days on which the Adviser is closed and the NYSE is open are Veterans' Day
and Columbus 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 or-
der. 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 un-
reliable, fair value prices may be determined in good faith using methods ap-
proved 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 se-
curities 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.
25
<PAGE>
-------------------------------------------------------------
Automatic Investment Program
If you have a checking, money market or NOW account with a bank, you may pur-
chase 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 in-
vestments 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 ac-
count number and sign the request.
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness 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. Shares will not be redeemed by the Fund unless all required documents
have been received by the Fund.
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 institu-
tion 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 re-
ceives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic with-
drawal 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 ac-
count (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 re-
quired 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 trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed. More information about this is in our Statement of Additional Informa-
tion.
26
<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
certain portfolios of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year. We may
also reject any exchange request if we determine that such exchange is not in
the best interests of a Fund or its shareholders. Shares can be exchanged di-
rectly by mail, or by telephone if you previously selected the telephone ex-
change option on the account application.
You may also exchange shares through your financial institution. Exchange re-
quests 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 in-
structions, 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 pur-
chase, 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 trans-
mitting requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay an administrative 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 distribu-
tion 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 deal-
ers, 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 mer-
chandise, airline vouchers, trips and vacation packages, to dealers selling
shares.
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 af-
filiates 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.
27
<PAGE>
-------------------------------------------------------------
Taxes
Each Fund will distribute 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. 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 ac-
count 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-quali-
fied 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 se-
curities 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 nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, 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 situa-
tion.
More information about taxes is in the Statement of Additional Information.
28
<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 finan-
cial 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
Ernst & Young LLP, independent auditors. Their report, along with each Fund's
financial statements, are incorporated by reference into our Statement of Addi-
tional Information. You can obtain the annual report, which contains more per-
formance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8280).
BLENDED EQUITY FUND
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $ 42.51 $ 36.12 $ 25.81 $ 24.43 $ 21.40
------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income............ 0.03 0.11 0.16 0.18 0.12
Net Gains on Securities (both
realized and unrealized)........ 9.54 6.90 12.59 2.50 5.21
------- ------- ------- ------- -------
Total From Investment
Operations...................... 9.57 7.01 12.75 2.68 5.33
------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment
Income.......................... (0.06) (0.13) (0.16) (0.14) (0.11)
Distributions From Net Realized
Gain on Investments and
Options......................... (1.34) (0.49) (2.28) (1.16) (2.19)
------- ------- ------- ------- -------
Total Distributions.............. (1.45) (0.62) (2.44) (1.30) (2.30)
------- ------- ------- ------- -------
Net Asset Value, End of Year...... $ 50.63 $ 42.51 $ 36.12 $ 25.81 $ 24.43
======= ======= ======= ======= =======
Total Return...................... 22.90% 19.65% 50.82% 11.09% 26.45%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)....................... $993.41 $720.27 $594.91 $306.99 $188.57
Ratio of Net Operating Expenses
to Average Net Assets........... 0.97% 0.95% 0.99% 1.01% 1.05%
Ratio of Gross Operating Expenses
to Average Net Assets/1/ ....... 1.02% 1.01% 1.06% 1.06% 1.12%
Ratio of Net Investment Income to
Average Net Assets.............. 0.08% 0.29% 0.55% 0.71% 0.55%
Portfolio Turnover Rate.......... 24.0% 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.
29
<PAGE>
-----------------------------------------------------------------
LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
Year Ended
March 31,
---------------- Period Ended
2000 1999 March 31, 1998/1/
------- ------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 14.30 $ 8.51 $ 7.00
------- ------- -------
Income From Investment Operations
Net Investment Income (Loss).............. (0.06) (0.03) 0.00/2/
Net Gains or (Losses) on Securities (both
realized and unrealized)................. 4.74 5.82 1.51
------- ------- -------
Total From Investment Operations........... 4.68 5.79 1.51
------- ------- -------
Net Asset Value, End of Period............. $ 18.98 $ 14.30 $ 8.51
======= ======= =======
Total Return............................... 32.73% 68.04% 21.57%/3/
Ratios/Supplemental Data
Net Assets, End of Period (in millions)... $498.31 $251.55 $ 47.53
Ratio of Net Operating Expenses to Average
Net Assets............................... 1.01% 1.04% 1.05%/4/
Ratio of Gross Operating Expenses to
Average Net Assets/5/.................... 1.07% 1.08% 1.20%/4/
Ratio of Net Investment Income/(Loss) to
Average Net Assets....................... (0.48)% (0.53)% (0.16)%/4/
Portfolio Turnover Rate................... 20% 4% 12%/4/
</TABLE>
------
Notes:
1. Inception date of the Fund was October 1, 1997.
2. Amount represents less than $0.01 per share.
3. Not annualized.
4. Annualized.
5. Expense ratio before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
30
<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........................... $ 27.40 $ 16.31 $ 10.18 $ 9.87
------- ------- ------- ------
Income From Investment Operations:
Net Investment Income............ (0.11) (0.06) (0.01) 0.02
Net Gains or (losses) on
Securities (both realized and
unrealized)..................... 7.16 11.15 6.15 0.31/2/
------- ------- ------- ------
Total From Investment Operations.. 7.05 11.09 6.14 0.33
------- ------- ------- ------
Less Distributions:
Dividends From Net Investment
Income.......................... 0.00 0.00 (0.01) (0.02)
Distributions From Net Realized
Gains on Investments and
Options......................... $ (3.88) 0.00 0.00 0.00
------- ------- ------- ------
Total Distributions............... (3.88) 0.00 (0.01) (0.02)
------- ------- ------- ------
Net Asset Value, End of Period.... $ 30.57 $ 27.40 $ 16.31 $10.18
======= ======= ======= ======
Total Return...................... 27.40% 68.00% 60.41% 3.31%/3/
Ratios/Supplemental Data
Net Assets at end of Period (in
millions)....................... $ 21.97 $ 12.41 $ 6.60 $ 3.36
Ratio of Net Operating Expenses
to Average Net Assets........... 1.05% 1.05% 1.05% 1.05%/5/
Ratio of Gross Operating Expenses
to Average Net Assets/4/........ 1.18% 1.26% 1.32% 1.47%/5/
Ratio of Net Investment Income
(Loss) to Average Net Assets.... (0.43)% (0.34)% (0.12)% 0.33%/5/
Portfolio Turnover............... 44% 22% 19% 20%/5/
</TABLE>
------
Notes:
1. Inception date of the Fund was July 3, 1996.
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.
31
<PAGE>
-----------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998 1997 1996
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 9.27 $ 11.95 $ 8.83 $ 10.78 $ 9.77
------- -------- ------- -------- -------
Income From Investment Operations
Net Investment Income (Loss).... 0.00 0.00 (0.01) (0.03) (0.02)
Net Gains or (Losses) on
Securities (both realized
and unrealized)................ 6.12 (2.56) 3.13 (1.43) 1.72
------- -------- ------- -------- -------
Total From Investment
Operations...................... 6.12 (2.56) 3.12 (1.46) 1.70
------- -------- ------- -------- -------
Less Distributions
Distributions From Net Realized
Gain on Investments
and Options.................... 0.00 (0.12) 0.00 (0.10) (0.69)
Distributions in Excess of Net
Realized Gain on Investments
and Options.................... 0.00 0.00 0.00 (0.39) 0.00
------- -------- ------- -------- -------
Total Distributions.............. 0.00 (0.12) 0.00 (0.49) (0.69)
------- -------- ------- -------- -------
Net Asset Value, End of Period... $ 15.39 $ 9.27 $ 11.95 $ 8.83 $ 10.78
======= ======== ======= ======== =======
Total Return..................... 65.91% (21.41)% 35.33% (14.33)% 18.29%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)...................... $107.94 $ 43.79 $ 68.55 $ 53.26 $ 78.06
Ratio of Net Operating Expenses
to Average Net Assets.......... 0.92% 0.94% 0.94% 0.94% 0.90%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/...................... 1.03% 1.05% 1.01% 1.02% 0.98%
Ratio of Net Investment
Income/(Loss) to Average
Net Assets..................... 0.01% (0.04)% (0.14)% (0.26)% (0.17)%
Portfolio Turnover Rate......... 134.0% 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.
32
<PAGE>
-----------------------------------------------------------------
VALUE EQUITY 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.............................. $15.35 $16.11 $11.33 $ 12.08
------ ------ ------ -------
Income From Investment Operations:
Net Investment Income............... 0.01 0.08 0.07 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized)..... 6.35 0.55 5.57 (0.76)
------ ------ ------ -------
Total From Investment Operations..... 6.36 0.63 5.64 (0.75)
------ ------ ------ -------
Less Distributions:
Dividends From Net Investment
Income............................. (0.05) (0.07) (0.06) 0.00
Distributions From Net Realized
Gains on Investments and Options... (0.32) (1.32) (0.80) 0.00
------ ------ ------ -------
Total Distributions.................. (0.37) (1.39) (0.86) 0.00
------ ------ ------ -------
Net Asset Value, End of Period....... $21.34 $15.35 $16.11 $ 11.33
====== ====== ====== =======
Total Return......................... 41.60% 4.59% 51.09% (6.21)%/2/
Ratios/Supplemental Data
Net Assets at end of Period (in
millions).......................... $ 336 $ 125 $ 78 $ 56
Ratio of Net Operating Expenses to
Average Net Assets................. 1.05% 1.05% 1.05% 1.05%/3/
Ratio of Gross Operating Expenses to
Average Net Assets/4/.............. 1.20% 1.32% 1.35% 1.43%/3/
Ratio of Net Investment Income
(Loss) to Average Net Assets....... 0.02% 0.53% 0.47% 0.54%/3/
Portfolio Turnover.................. 45% 55% 51% 64%/3/
</TABLE>
------
Notes:
1. Inception date of the Fund was January 15, 1997.
2. Not annualized.
3. Annualized.
4. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
33
<PAGE>
-----------------------------------------------------------------
VALUE AND RESTRUCTURING FUND
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998 1997 1996
--------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 23.88 $ 23.79 $ 15.93 $ 14.03 $10.55
--------- ------- ------- ------- ------
Income From Investment Operations
Net Investment Income........... 0.07 0.13 0.10 0.13 0.10
Net Gains on Securities (both
realized and unrealized)....... 10.03 0.21 8.12 2.36 3.71
--------- ------- ------- ------- ------
Total From Investment
Operations...................... 10.10 0.34 8.22 2.49 3.81
--------- ------- ------- ------- ------
Less Distributions
Dividends From Net Investment
Income......................... (0.09) (0.11) (0.09) (0.12) (0.09)
Distributions From Net Realized
Gain on Investments and
Options........................ 0.00 (0.14) (0.27) (0.47) (0.24)
--------- ------- ------- ------- ------
Total Distributions.............. (0.09) (0.25) (0.36) (0.59) (0.33)
--------- ------- ------- ------- ------
Net Asset Value, End of Period... $ 33.89 $ 23.88 $ 23.79 $ 15.93 $14.03
========= ======= ======= ======= ======
Total Return..................... 42.41% 1.48% 52.10% 18.09% 36.48%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)...................... $1,207.24 $594.62 $388.45 $124.01 $74.05
Ratio of Net Operating Expenses
to Average Net Assets.......... 0.90% 0.93% 0.89% 0.91% 0.91%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/...................... 1.03% 1.07% 0.93% 0.95% 0.95%
Ratio of Net Investment Income
to Average Net Assets.......... 0.25% 0.59% 0.54% 0.90% 0.88%
Portfolio Turnover Rate......... 20.0% 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.
34
<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.............................. $11.02 $ 12.66 $11.12 $ 9.55 $ 7.92
Income From Investment Operations
Net Investment Income............... 0.04 0.10 0.09 0.09 0.07
Net Gains or (Losses) on Securities
(both realized and unrealized)..... 4.72 (1.65) 2.69 2.60 1.63
------ -------- ------ ------ ------
Total From Investment Operations..... 4.76 (1.55) 2.78 2.69 1.70
------ -------- ------ ------ ------
Less Distributions
Dividends From Net Investment
Income............................. (0.06) (0.09) (0.10) (0.09) (0.07)
Distributions From Net Realized Gain
on Investments and Options......... (0.51) 0.00 (1.07) (1.03) 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options............................ 0.00 0.00 (0.07) 0.00 0.00
------ -------- ------ ------ ------
Total Distributions.................. (0.57) (0.09) (1.24) (1.12) (0.07)
Net Asset Value, End of Period....... $15.21 $ 11.02 $12.66 $11.12 $ 9.55
====== ======== ====== ====== ======
Total Return......................... 44.61% (12.23)% 24.97% 28.28% 21.60%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $71.13 $ 43.02 $46.17 $33.39 $23.29
Ratio of Net Operating Expenses to
Average Net Assets................. 0.97% 0.98% 0.99% 0.93% 0.96%
Ratio of Gross Operating Expenses to
Average Net Assets/1/.............. 1.08% 1.09% 1.07% 0.98% 1.09%
Ratio of Net Investment Income to
Average Net Assets................. 0.37% 0.97% 0.69% 0.84% 0.88%
Portfolio Turnover Rate............. 138.0% 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.
35
<PAGE>
-----------------------------------------------------------------
REAL ESTATE FUND
<TABLE>
<CAPTION>
Year Ended
March 31, Period ended
---------------- March 31,
2000 1999 1998/1/
------ -------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 5.50 $ 7.05 $ 7.00
------ -------- ------
Income From Investment Operations
Net Investment Income.......................... 0.34 0.33 0.15
Net Gains or (Losses) on Securities (both
realized and unrealized)...................... (0.31) (1.55) 0.01
------ -------- ------
Total From Investment Operations................ 0.03 (1.22) 0.16
------ -------- ------
Less Distributions
Dividends From Net Investment Income........... (0.32) (0.33) (0.11)
Total Distributions............................. (0.32) (0.33) (0.11)
------ -------- ------
Net Asset Value, End of Period.................. $ 5.21 $ 5.50 $ 7.05
====== ======== ======
Total Return.................................... 0.58% (17.55)% 2.26%/2/
Ratios/Supplemental Data
Net Assets, End of Period (in millions)........ $33.70 $ 32.84 $41.17
Ratio of Net Operating Expenses to Average Net
Assets........................................ 1.20% 1.20% 1.20%/3/
Ratio of Gross Operating Expenses to Average
Net Assets/4/................................. 1.41% 1.43% 1.40%/3/
Ratio of Net Investment Income to Average Net
Assets........................................ 6.17% 5.37% 5.02%/3/
Portfolio Turnover Rate........................ 27.0% 28.0% 30.0%/3/
</TABLE>
------
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.
36
<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 fol-
lowing:
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) 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
From the SEC: You can also obtain the SAIs or the Annual and Semi-Annual re-
ports, 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 Pub-
lic 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 Ex-
change 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>
[GRAPHIC]
Excelsior International Funds
Prospectus
August 1, 2000
Excelsior Funds, Inc.
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.
[LOGO OF EXCELSIOR FUNDS]
<PAGE>
Table of Contents
Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals, strategies and
risks. 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 eas-
ily 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................................................... 4
Latin America Fund................................................... 6
Pacific/Asia Fund.................................................... 8
Pan European Fund.................................................... 10
Emerging Markets Fund................................................ 12
More Information About Risk.......................................... 14
More Information About Fund Investments.............................. 14
Investment Adviser................................................... 14
Portfolio Managers................................................... 15
Purchasing, Selling And Exchanging Fund Shares....................... 16
Dividends And Distributions.......................................... 19
Taxes................................................................ 19
Financial Highlights................................................. 20
How to Obtain More Information About Excelsior Funds, Inc............ Back Cover
</TABLE>
<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 in-
vestments 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, strategies and risks 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 man-
ager's judgments about the markets, the economy, or companies may not antici-
pate 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 invest-
ment 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 In-
surance Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the se-
curities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price move-
ments, 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
<PAGE>
International Fund
-----------------------------------------------------------------
FUND SUMMARY
Investment Goal Total return
through long-term capital
appreciation and income
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
Investment Objective
The International Fund seeks total return on its assets through capital appre-
ciation 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 ef-
fects 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 coun-
tries. While the Fund generally invests in companies in a variety of countries,
industries and sectors, the Adviser does not attempt to invest a specific per-
centage 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.
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 eco-
nomic 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 coun-
tries 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 (posi-
tively or negatively) the value of a Fund's investments. These currency move-
ments may happen separately from and in response to events that do not other-
wise affect the value of the security in the issuer's home country. These vari-
ous 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.
4
<PAGE>
-------------------------------------------------------------
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 volatil-
ity 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.
[GRAPH]
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 56.23%
Best Quarter Worst Quater
38.65% (18.29%)
(12/31/99) (9/30/90)
The Fund's performance for the six month period ending June 30, 2000 was
(4.98)%.
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>
5 10
1 Year Years Years
---------------------------------------------------
<S> <C> <C> <C>
International Fund 56.23% 16.21% 9.45%
MSCI EAFE Index* 26.97% 12.83% 7.01%
MSCI ACWI Free ex U.S. Index** 30.92% 12.49% 7.34%
</TABLE>
* The MSCI EAFE Index is an unmanaged index composed of a sample of companies
representative of the market structure of 20 European and Pacific Basin
countries.
** The MSCI ACWI Free ex U.S. Index is an unmanaged market capitalization
weighted index composed of 47 countries--21 developed markets and 26 emerg-
ing markets.
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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>
<S> <C> <C>
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.41%
Total Other Expenses 0.81%
---------------------------------------------
Total Annual Fund Operating
Expenses 1.81%
Fee Waivers and Expense
Reimbursements (0.31)%
---------------------------------------------
Net Annual Fund Operating Expenses 1.50%**
</TABLE>
* 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 in-
formation.
** The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
----------------------------
<S> <C> <C> <C> <C>
$153 $474 $818 $1,791
</TABLE>
5
<PAGE>
Latin America Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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 in-
cludes 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 geo-
graphic 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 in-vestments than if the Fund's investments were
more geographically diversified. The Fund's focus on Latin America also
increases its potential share price volatility.
The Latin American economies have experienced considerable difficulties, in-
cluding high inflation rates, high interest rates and currency devaluations. As
a result, Latin American securities markets have experienced extraordinary vol-
atility. 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 eco-
nomic events unique to a country or region will affect those markets and their
issuers. Such events will not necessarily affect the U.S. economy
6
<PAGE>
-------------------------------------------------------------
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 volatil-
ity 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.
[GRAPH]
1993 39.73%
1994 (10.67)%
1995 (10.57)%
1996 24.88%
1997 25.15%
1998 (47.70)%
1999 41.53%
Best Quarter Worst Quarter
40.39% (37.16)%
(12/31/99) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was 1.54%.
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>
5 Since
1 Year Years Inception
------------------------------------------
<S> <C> <C> <C> <C> <C>
Latin America
Fund 41.53% 0.68% 3.72%*
MSCI EMF Latin
America Index 58.86% 7.65% 12.21%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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>
<S> <C> <C>
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.64%
Total Other Expenses 1.04%
---------------------------------------------
Total Annual Fund Operating
Expenses 2.04%
Fee Waivers and Expense
Reimbursements (0.34)%
---------------------------------------------
Net Annual Fund Operating Expenses 1.70%**
</TABLE>
* This redemption fee is charged if you sell your shares within 30 days of the
date of purchase. See "How to Sell Your Fund Shares" for more information.
** The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.70%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 10
Year 3 Years 5 Years Years
--------------------------------
<S> <C> <C> <C> <C>
$173 $536 $923 $2,009
</TABLE>
7
<PAGE>
Pacific/Asia Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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 Pa-
cific 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 invest-
ment approach designed to identify companies that the Adviser expects to expe-
rience sustainable earnings growth and to benefit from global or regional eco-
nomic trends or promising technologies or products and whose value is not rec-
ognized 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 coun-
tries. While the Fund generally invests in companies in a variety of coun-
tries, industries and sectors, the Adviser does not attempt to invest a spe-
cific 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 geo-
graphic 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 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, in-
cluding, at various times, high inflation rates, high interest rates and cur-
rency devaluations. As a result, Pacific Basin securities markets have experi-
enced extraordinary volatility. Continued growth of the Pacific Basin econo-
mies and securities markets will require sustained economic and fiscal disci-
pline, which has been lacking in the past, as well as continued commitment to
governmental reforms. Development also may be influenced by international eco-
nomic 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 securi-
ties may fluctuate substantially from day to day. Individual companies may re-
port 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 eco-
nomic events unique to a country
8
<PAGE>
-------------------------------------------------------------
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 coun-
tries since political turmoil and rapid changes are more likely to occur in
these countries. These risks are discussed in greater detail in the section en-
titled "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 volatil-
ity 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.
[GRAPH]
1993 66.25%
1994 (14.69)%
1995 8.50%
1996 7.23%
1997 (32.15)%
1998 (1.76)%
1999 101.80%
Best Quarter Worst Quarter
39.80% (21.14%)
(12/31/99) (12/31/97)
The Fund's performance for the six month period ending June 30, 2000 was
(13.76)%.
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>
Since
1 Year 5 Years Inception
-----------------------------------------------------
<S> <C> <C> <C>
Pacific/Asia Fund 101.80% 9.37% 12.07%*
MSCI AC Asia Pacific Index 59.67% 1.99% 8.16%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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>
<S> <C> <C>
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.50%
Total Other Expenses 0.90%
---------------------------------------------
Total Annual Fund Operating
Expenses 1.90%
Fee Waivers and Expense
Reimbursements (0.40)%
---------------------------------------------
Net Annual Fund Operating Expenses 1.50%**
</TABLE>
* This redemption fee is charged if you sell your shares within 30 days of the
date of purchase. See "How to Sell Your Fund Shares" for more information.
** The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
----------------------------
<S> <C> <C> <C> <C>
$153 $474 $818 $1,791
</TABLE>
9
<PAGE>
Pan European Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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 devel-
oped countries to capitalize on opportunities in the emerging markets of East-
ern Europe. The Adviser generally does not attempt to hedge the effects of cur-
rency 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 sec-
tors, 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 geo-
graphic region--Europe. The economic and political environments of countries in
a particular region frequently are interrelated and the value of regional mar-
kets 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 geo-
graphically diversified. The Fund's focus on Europe also increases its poten-
tial share price volatility.
European countries have, at times, experienced economic difficulties, including
recession, currency fluctuations, and armed conflicts. In addition, the emerg-
ing economies of Eastern Europe have experienced political and economic diffi-
culties 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 eco-
nomic 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 in-
vestments in emerging market
10
<PAGE>
-------------------------------------------------------------
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 en-
titled "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 volatil-
ity 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.
[GRAPH]
1993 17.26%
1994 0.04%
1995 14.90%
1996 21.64%
1997 24.29%
1998 11.78%
1999 24.39%
Best Quarter Worst Quarter
28.80% (16.26%)
(12/31/99) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was 4.87%.
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>
5 Since
1 Year Years Inception
------------------------------------------
<S> <C> <C> <C>
Pan European Fund 24.39% 19.29% 16.05%*
MSCI Europe Index 15.91% 22.12% 19.54%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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>
<S> <C> <C>
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.43%
Total Other Expenses 0.83%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.83%
Fee Waivers and Expense Reimbursements (0.33)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.50%**
</TABLE>
* This redemption fee is charged if you sell your shares within 30 days of the
date of purchase. See "How to Sell Your Fund Shares" for more information.
** The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 10
Year 3 Years 5 Years Years
--------------------------------
<S> <C> <C> <C> <C>
$153 $474 $818 $1,791
</TABLE>
11
<PAGE>
Emerging Markets Fund
-----------------------------------------------------------------
FUND SUMMARY
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
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 eq-
uity 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 op-
erations and economic ties to one or more specific countries. While the Fund
generally invests in companies in a variety of countries, industries and sec-
tors, 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 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 eco-
nomic 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 coun-
tries 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 (posi-
tively or negatively) the value of a Fund's investments. These currency move-
ments may happen separately from and in response to events that do not other-
wise affect the value of the security in the issuer's home country. These vari-
ous 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 Na-
tions considers to be emerging or developing. Emerging markets may be more
likely to experience political turmoil or rapid changes in market
12
<PAGE>
-------------------------------------------------------------
or economic conditions than more developed countries. In addition, the finan-
cial 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 volatil-
ity 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.
[GRAPH]
1998 (41.21%)
1999 67.35%
Best Quarter Worst Quarter
59.10% (33.36)%
(12/31/99) (9/30/98)
The Fund's performance for the six month period ending June 30, 2000 was
(9.21)%.
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.
<TABLE>
<CAPTION>
One Since
Year Inception
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets Fund 67.35% (0.81)%*
MSCI EMF (Emerging Markets Free) Index 66.42% 11.47%**
</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 par-
ticular 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>
<S> <C> <C>
Management Fees 1.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.70%
Total Other Expenses 1.10%
-------------------------------------------------------
Total Annual Fund Operating Expenses 2.35%
Fee Waivers and Expense Reimbursements (0.65)%
-------------------------------------------------------
Net Annual Fund Operating Expenses 1.70%**
</TABLE>
* This redemption fee is charged if you sell your shares within 30 days of the
date of purchase. See "How to Sell Your Fund Shares" for more information.
** The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.70%, for the period
commencing on the date of this prospectus and ending March 31, 2001. 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 distribu-
tions. Although your actual costs 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> <C>
$173 $536 $923 $2,009
</TABLE>
13
<PAGE>
-------------------------------------------------------------
More Information About Risk
Equity Risk
(All Funds)--Equity securities include public and privately issued equity secu-
rities, 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 gen-
eral are subject to market risks that may cause their prices to fluctuate over
time. The value of securities convertible into equity securities, such as war-
rants or convertible debt, is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision.
Foreign Security Risks
(All Funds)--Investments in 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 appropria-
tion, could affect investments in foreign countries. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets. In ad-
dition, the value of securities denominated in foreign currencies, and of divi-
dends from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign companies or govern-
ments 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. secu-
rities. Some foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are recov-
erable, the non-recovered portion will reduce the income received from the se-
curities comprising the portfolio.
Emerging Market Risks
(All Funds)--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 eco-
nomic conditions than more developed countries. In addition, the financial sta-
bility 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 rel-
ative to the U.S. dollar.
Currency Risk
(All Funds)--Investments in foreign securities denominated in foreign curren-
cies 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.
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 condi-
tions, 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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share owner
14
<PAGE>
-------------------------------------------------------------
ship, Mr. Schwab may be deemed to be a controlling person of Schwab and its
subsidiaries. Through its principal subsidiary Charles Schwab & Co., Inc.,
Schwab is one of the nation's largest financial services firms and the nation's
largest electronic brokerage firm, in each case measured by customer assets. At
December 31, 1999, Schwab served 6.6 million active accounts with $725 billion
in customer assets.
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 manage-
ment, 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.
U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the security subject to research.
The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and es-
tablishes 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>
International Fund 0.90%
Latin America Fund 0.89%
Pacific/Asia Fund 0.91%
Pan European Fund 0.94%
Emerging Markets Fund 0.87%
</TABLE>
Portfolio Managers
Rosemary Sagar has served as the International and Pan European Funds' portfo-
lio manager since 1996. Beginning in August 2000, Leonard Geiger serves as co-
manager with Ms. Sagar of the Pan European Fund. 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. Mr.
Geiger, a Vice President of U.S. Trust's Global Investment Division, has been
with U.S. Trust since 1996. From 1994 to 1996, Mr. Geiger was an Associate in
Equity Research at Deutsche Morgan Grenfell. Ms. Sagar is primarily responsible
for the day to day management of the International Fund's portfolio, and Ms.
Sagar and Mr. Geiger are the persons primarily responsible for the day to day
management of the Pan European Fund's portfolio. Research, analyses, trade exe-
cution and other facilities provided by U.S. Trust and other personnel also
play a significant role in portfolio management and performance.
Donald Elefson serves as the manager 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. Mr.
Elefson is 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 signif-
icant 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
15
<PAGE>
-------------------------------------------------------------
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.
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 Ex-
celsior 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 in-
vestment 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 en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.
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 proce-
dures, 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 corre-
spondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for deal-
ers, 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 mer-
chandise, 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"). Presently, the only Busi-
ness Days on which the Adviser is closed and the NYSE is open are Veterans' Day
and Columbus 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 or-
der. 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.
16
<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 un-
reliable, fair value prices may be determined in good faith using methods ap-
proved by the Board of Directors. Fixed income investments with remaining matu-
rities 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 se-
curities 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 pur-
chase 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 in-
vestments 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, 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 ac-
count number and sign the request.
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness 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. Shares will not be redeemed by the Fund unless all required documents
have been received by the Fund.
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 institu-
tion 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 re-
ceives 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 re-
demption 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 fee will be charged on redemptions and exchanges involving (i) those
that occur as a result of 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, (iii)
17
<PAGE>
-------------------------------------------------------------
shares redeemed as part of a systematic withdrawal plan that represent 4% or
less of the investor's investment subject to the plan account, or (iv) shares
maintained through employee pension benefit plans subject to the Employee Re-
tirement Income Security Act that offer the Excelsior Funds as an investment
vehicle. For purposes of omnibus accounts, the redemption fee will be deter-
mined at the sub-account level.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic with-
drawal 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 ac-
count (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 re-
quired 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 trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed.
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
certain portfolios of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year. We may
also reject any exchange request if we determine that such exchange is not in
the best interests of a Fund or its shareholders. Shares can be exchanged di-
rectly by mail, or by telephone if you previously selected the telephone ex-
change option on the account application.
You may also exchange shares through your financial institution. Exchange re-
quests 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 in-
structions, 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 pur-
chase, redemption and exchange requests for Fund shares. These requests are
normally executed at the NAV next determined after the interme-
18
<PAGE>
-------------------------------------------------------------
diary receives the request in good order. Authorized intermediaries are respon-
sible for transmitting requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay an administrative 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 organiza-
tion.
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 af-
filiates 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 div-
idends 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 gain 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 in-
come.
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 share-
holder 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 deduc-
tion.
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."
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 ac-
count 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 re-
ceived 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 se-
curities 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 nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, 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.
19
<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 sin-
gle 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
Ernst & Young LLP, independent auditors. Their report, along with each Fund's
financial statements, are incorporated by reference into our Statement of Addi-
tional Information. You can obtain the annual report, which contains more per-
formance information, at no charge by calling (800)-446-1012 (from overseas,
call (617) 557-8280).
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $ 12.52 $ 13.00 $ 11.34 $ 10.91 $ 9.82
------- ------- ------- ------- ------
Income From Investment Operations
Net Investment Income (Loss).... (0.03) 0.01 0.04 0.09 0.10
Net Gains or (Losses) on
Securities (both realized and
unrealized)....................... 7.57 (0.42) 2.11 0.63 1.15
------- ------- ------- ------- ------
Total From Investment
Operations...................... 7.54 (0.41) 2.15 0.72 1.25
------- ------- ------- ------- ------
Less Distributions
Dividends From Net Investment
Income......................... 0.00 (0.03) (0.02) (0.10) (0.08)
Dividends in Excess of Net
Investment Income.............. 0.00 (0.04) (0.04) (0.00) (0.01)
Distributions From Net Realized
Gain on Investments............ (0.04) 0.00 (0.31) (0.19) (0.07)
Distributions in Excess of Net
Realized Gain on Investments... 0.00 0.00 (0.12) 0.00 0.00
------- ------- ------- ------- ------
Total Distributions.............. (0.04) (0.07) (0.49) (0.29) (0.16)
------- ------- ------- ------- ------
Net Asset Value, End of Year..... $ 20.02 $ 12.52 $ 13.00 $ 11.34 $10.91
======= ======= ======= ======= ======
Total Return..................... 60.30% (3.18)% 19.42% 6.78% 12.77%
Ratios/Supplemental Data
Net Assets, End of Period (in
Millions)...................... $473.77 $202.08 $204.89 $126.82 $97.85
Ratio of Net Operating Expenses
to Average Net Assets.......... 1.40% 1.42% 1.44% 1.43% 1.40%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/ ..................... 1.51% 1.52% 1.52% 1.51% 1.50%
Ratio of Net Investment Income
to Average Net Assets.......... (0.36)% 0.11% 0.32% 0.70% 0.82%
Portfolio Turnover Rate......... 25.0% 50.0% 37.0% 116.0% 39.0%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
20
<PAGE>
-----------------------------------------------------------------
LATIN AMERICA FUND
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 4.77 $10.60 $ 9.46 $ 7.37 $ 5.86
------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income................. 0.03 0.21 0.10 0.05 0.10
Net Gains or (Losses) on Securities
(both realized and unrealized)....... 2.53 (5.29) 1.22 2.09 1.49
------ ------ ------ ------ ------
Total From Investment Operations....... 2.56 (5.08) 1.32 2.14 1.59
------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment Income.. (0.13) (0.18) (0.02) (0.05) (0.04)
Dividends in Excess of Net Investment
Income............................... 0.00 0.00 0.00 0.00 (0.04)
Distributions From Net Realized Gain
on Investments....................... 0.00 0.00 (0.16) 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments......... 0.00 (0.57) 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions.................... (0.13) (0.75) (0.18) (0.05) (0.08)
------ ------ ------ ------ ------
Net Asset Value, End of Period......... $ 7.20 $ 4.77 $10.60 $ 9.46 $ 7.37
====== ====== ====== ====== ======
Total Return........................... 54.52% (47.19) 14.05% 29.09% 27.29%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)............................ $23.71 $14.18 $88.70 $70.90 $43.16
Ratio of Net Operating Expenses to
Average Net Assets................... 1.64% 1.55% 1.50% 1.48% 1.48%
Ratio of Gross Operating Expenses to
Average Net Assets/1/ ............... 1.75% 1.66% 1.60% 1.56% 1.57%
Ratio of Net Investment Income/(Loss)
to Average Net Assets................ 0.42% 1.63% 0.88% 0.50% 1.12%
Portfolio Turnover Rate............... 69.0% 29.0% 77.0% 73.0% 54.0%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
21
<PAGE>
-----------------------------------------------------------------
PACIFIC/ASIA FUND
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 6.61 $ 6.52 $ 9.09 $ 9.78 $ 8.45
------- ------ -------- ------- ------
Income From Investment Operations
Net Investment Income............ 0.02 0.00/2/ 0.01 0.07 0.12
Net Gains or (Losses) on
Securities (both realized and
unrealized)..................... 5.26 0.29 (2.52) (0.53) 1.33
------- ------ -------- ------- ------
Total From Investment Operations.. 5.28 0.29 (2.51) (0.46) 1.45
------- ------ -------- ------- ------
Less Distributions
Dividends From Net Investment
Income.......................... 0.00 (0.09) (0.01) (0.07) (0.09)
Dividends in Excess of Net
Investment Income............... 0.00 (0.11) (0.05) 0.00 (0.01)
Distributions From Net Realized
Gain on Investments............. 0.00 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 0.00
------- ------ -------- ------- ------
Total Distributions............... 0.00 (0.20) (0.06) (0.23) (0.12)
------- ------ -------- ------- ------
Net Asset Value, End of Period.... $ 11.89 $ 6.61 $ 6.52 $ 9.09 $ 9.78
======= ====== ======== ======= ======
Total Return...................... 79.88% 5.14% (27.56)% (4.80)% 17.22%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)....................... $ 88.54 $28.01 $ 43.81 $ 89.95 $76.19
Ratio of Net Operating Expenses
to Average Net Assets........... 1.49% 1.55% 1.48% 1.45% 1.43%
Ratio of Gross Operating Expenses
to Average Net Assets/1/ ....... 1.58% 1.64% 1.57% 1.52% 1.51%
Ratio of Net Investment Income to
Average Net Assets.............. (0.48)% 0.01% 0.22% 0.69% 1.12%
Portfolio Turnover Rate.......... 105.0% 78.0% 52.0% 126.0% 29.0%
</TABLE>
------
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.
22
<PAGE>
-----------------------------------------------------------------
PAN EUROPEAN FUND
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 12.39 $ 14.13 $ 10.94 $ 9.19 $ 8.19
------- ------- ------- ------- ------
Income From Investment Operations
Net Investment Income (Loss).... (0.03) 0.00/2/ (0.01) 0.11 0.11
Net Gains or (Losses) on
Securities (both Realized and
unrealized).................... 4.90 (1.26) 4.01 2.01 1.35
------- ------- ------- ------- ------
Total From Investment
Operations..................... 4.87 (1.26) 4.00 2.12 1.46
------- ------- ------- ------- ------
Less Distributions
Dividends From Net Investment
Income......................... 0.00 0.00 0.00 (0.10) (0.10)
Dividends in Excess of Net
Investment Income.............. 0.00 0.00 0.00 0.00 0.00
Distributions From Net Realized
Gain on Investments............ (1.30) (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 0.00
------- ------- ------- ------- ------
Total Distributions............. (1.30) (0.48) (0.81) (0.37) (0.46)
------- ------- ------- ------- ------
Net Asset Value, End of Period... $ 15.96 $ 12.39 $ 14.13 $ 10.94 $ 9.19
======= ======= ======= ======= ======
Total Return..................... 42.77% (8.84)% 38.02% 23.76% 18.25%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)...................... $195.42 $157.84 $207.64 $121.99 $47.92
Ratio of Net Operating Expenses
to Average Net
Assets.......................... 1.43% 1.43% 1.43% 1.45% 1.46%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/ ..................... 1.50% 1.50% 1.50% 1.52% 1.55%
Ratio of Net Investment
Income/(Loss) to Average Net
Assets......................... (0.21)% 0.04% (0.13)% 1.23% 1.28%
Portfolio Turnover Rate......... 46.0% 46.0% 40.0% 82.0% 42.0%
</TABLE>
------
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.
23
<PAGE>
-----------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
Year ended March
31, Period ended
----------------- March 31,
2000 1999 1998/1/
------- -------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 4.04 $ 7.00 $ 7.00
------- -------- -------
Income From Investment Operations:
Net Investment Income (Loss).............. (0.02) 0.07 0.00
Net Gains or (Losses) on Securities (both
realized and unrealized)................. 3.35 (2.95) 0.00
------- -------- -------
Total From Investment Operations.......... 3.33 (2.88) 0.00
------- -------- -------
Less Distributions:
Dividends From Net Investment Income...... (0.02) (0.08) 0.00
Distributions From Net Realized Gain on
Investments.............................. 0.00 0.00 0.00
------- -------- -------
Total Distributions....................... (0.02) (0.08) 0.00
------- -------- -------
Net Asset Value, End of Period............. $ 7.35 $ 4.04 $ 7.00
======= ======== =======
Total Return............................... 82.77% (41.21)% (0.14)%/2/
Ratios/Supplemental Data:
Net Assets, End of Period (in millions)... $ 17.20 $ 5.41 $ 6.54
Ratio of Net Operating Expenses to Average
Net Assets............................... 1.65% 1.65% 1.85%/3/,/4/
Ratio of Gross Operating Expenses to Aver-
age Net Assets/5/ ....................... 2.03% 2.48% 2.74%/3/
Ratio of Net Investment Income to Average
Net Assets............................... (0.60)% 1.93% 2.33%/3/
Portfolio Turnover Rate................... 57.0% 73.0% 0.0%
</TABLE>
------
Notes:
1. Inception date of the Fund was January 2, 1998.
2. Not annualized.
3. Annualized.
4. The annualized ratio of net operating expenses to average net assets,
excluding foreign investment taxes, is 1.65%.
5. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
24
<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 fol-
lowing:
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
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual re-
ports, 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 re-
quest documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section, Wash-
ington, 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.
<PAGE>
[GRAPHIC]
Excelsior Fixed Income Funds
Prospectus
August 1, 2000
Excelsior Funds, Inc.
Managed Income Fund
Intermediate-Term Managed Income Fund
Short-Term Government Securities Fund
Investment Adviser
United States Trust Company of New York and 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.
[LOGO OF EXCELSIOR FUNDS]
<PAGE>
Table of Contents
Excelsior Funds, Inc. is a mutual fund family that offers shares in separate
investment portfolios which have individual investment goals, strategies and
risks. This prospectus gives you important information about the Managed In-
come, 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 eas-
ily 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.................................................. 4
Intermediate-Term Managed Income Fund................................ 6
Short-Term Government Securities Fund................................ 8
More Information About Risk.......................................... 10
More Information About Fund Investments.............................. 11
Investment Adviser................................................... 11
Portfolio Managers................................................... 12
Purchasing, Selling and Exchanging Fund Shares....................... 12
Dividends and Distributions.......................................... 15
Taxes................................................................ 15
Financial Highlights................................................. 16
How to Obtain More Information About Excelsior Funds................. Back Cover
</TABLE>
<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, strategies and risks 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 man-
ager's judgments about the markets, the economy, or companies may not antici-
pate 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 invest-
ment 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 Insur-
ance Corporation (FDIC) or any government agency.
The value of your investment in a Fund is based on the market prices of the se-
curities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price move-
ments, 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
<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 be-
lieved 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 invest-
ment 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 con-
ditions to provide a competitive current yield and reasonable principal vola-
tility. 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 develop-
ments, 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.
The Fund's U.S. government securities are not guaranteed against price move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment 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 cal-
culate 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
4
<PAGE>
-------------------------------------------------------------
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 mar-
kets as a whole.
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPHIC]
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 -2.59%
Best Quarter Worst Quarter
8.09% (4.24)%
(6/30/95) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 4.01%.
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Lehman Brothers Government/Credit Bond
Index.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
-------------------------------------------------
<S> <C> <C> <C>
Managed Income Fund (2.59)% 7.42% 7.39%
Lehman Brothers
Govt/Credit Bond Index (2.15)% 7.60% 7.65%
</TABLE>
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.75%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.23%
Total Other Expenses 0.63%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.38%
Fee Waivers and Expense Reimbursements (0.48)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.90%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.90%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser and Portfolio Manag-
ers."
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 distribu-
tions. Although your actual costs 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> <C>
$92 $287 $498 $1,108
</TABLE>
5
<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 in-
terest 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. govern-
ment, 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 as-
sessment of real interest rates and the yield curve. The fixed income securi-
ties held by the Fund also may have the potential for moderate price apprecia-
tion. 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 develop-
ments, 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.
The Fund's U.S. government securities are not guaranteed against price move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment 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 cal-
culate 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."
6
<PAGE>
-------------------------------------------------------------
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 secu-
rities 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 volatil-
ity 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.
[GRAPH]
1993 8.44%
1994 -3.71%
1995 19.23%
1996 1.92%
1997 8.49%
1998 8.46%
1999 -1.57%
Best Quarter Worst Quarter
6.83% (3.79)%
(6/30/95) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 3.23%.
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/Credit Bond Index.
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception
------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Managed Income Fund (1.57)% 7.08% 5.66%*
Lehman Brothers Intermediate Govt/Credit Bond Index 0.39% 7.09% 5.99%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.35%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.23%
Total Other Expenses 0.63%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.98%
Fee Waivers and Expense Reimbursements (0.33)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.65%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.65%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser and Portfolio Manag-
ers."
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 distribu-
tions. Although your actual costs 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> <C>
$66 $208 $362 $810
</TABLE>
7
<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. govern-
ment, 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 invest-
ments, 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 develop-
ments, 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.
The Fund's U.S. government securities are not guaranteed against price move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment 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 cal-
culate 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 mar-
kets as a whole.
8
<PAGE>
-------------------------------------------------------------
Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity 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.
[GRAPHIC]
1993 4.32%
1994 1.07%
1995 10.25%
1996 3.97%
1997 5.87%
1998 6.30%
1999 2.40%
Best Quarter Worst Quarter
3.35% (0.45)%
(6/30/95) (3/31/94)
The Fund's performance for the six month period ending June 30, 2000 was 2.56%.
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>
Since
1 Year 5 Years Inception
------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Government Securities Fund 2.40% 5.73% 4.85%*
Lehman Brothers 1-3 Year Government Bond Index 2.96% 6.47% 5.45%*
</TABLE>
* Since December 31, 1992
What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular 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 0.30%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.24%
Total Other Expenses 0.64%
------------------------------------------------------
Total Annual Fund Operating Expenses 0.94%
Fee Waivers and Expense Reimbursements (0.34)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.60%*
</TABLE>
* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.60%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser and Portfolio Manag-
ers."
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 distribu-
tions. Although your actual costs 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> <C>
$61 $192 $335 $750
</TABLE>
9
<PAGE>
-------------------------------------------------------------
More Information About Risk
Fixed Income Risk
(All Funds)--The market value of fixed income 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. During
periods of rising interest rates, the values of outstanding fixed income secu-
rities generally fall. 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
(All Funds)--During periods of falling interest rates, certain debt obliga-
tions 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 fluc-
tuate, and may require a Fund to invest the resulting proceeds at lower in-
terest rates.
Credit Risk
(All Funds)--The possibility that an issuer will be unable to make timely
payments of either principal or interest.
Event Risk
(All Funds)--Securities may suffer declines in credit quality and market
value due to issuer restructurings or other factors. This risk should be re-
duced because of a Fund's multiple holdings.
High-Yield, Lower Rated Securities
(Intermediate-Term Managed Income Fund and Managed Income Fund)--"Junk bonds"
are subject to additional risks associated with investing in high-yield securi-
ties, including:
Greater risk of default or price declines due to changes in the issuer's cred-
itworthiness. 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 matu-
rity. 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 per-
ception 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
(All Funds)--Mortgage-backed securities are fixed income securities represent-
ing 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 un-
derlying 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 de-
crease in market price. When interest rates fall, however, mortgage-backed se-
curities may not gain as much in market value because of the expectation of ad-
ditional 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 volatil-
ity risk of that portfolio.
Foreign Security Risks
(Managed Income Fund and Intermediate-Term Managed Income Fund)--Investments in
securities of foreign companies or governments can be more volatile than in-
vestments in U.S. companies or governments. Diplomatic, political, or economic
developments, including nationalization or appropriation, could affect invest-
ments 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 secu-
rities, 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 com-
parable to those applicable to domestic U.S. companies or governments. Transac-
tion costs are generally higher than those in the U.S. and expenses for custo-
dial 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 in-
10
<PAGE>
-------------------------------------------------------------
terest income. Although in some countries a portion of these taxes is recover-
able, the non-recovered portion will reduce the income received from the secu-
rities comprising the portfolio.
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 condi-
tions, 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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its principal sub-
sidiary Charles Schwab & Co., Inc., Schwab is one of the nation's largest fi-
nancial services firms and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets.
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 manage-
ment, 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.
U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the securities subject to research.
The Board of Directors of Excelsior Funds, Inc. supervises the Adviser and es-
tablishes 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>
Short-Term Government Securities Fund..................................... 0.22%
Intermediate-Term Managed Income Fund..................................... 0.28%
Managed Income Fund....................................................... 0.62%
</TABLE>
11
<PAGE>
-------------------------------------------------------------
Portfolio Managers
Frank A. Salem has served as the Intermediate-Term Managed Income Fund's port-
folio manager since August 1998. 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 In-
come 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. Pow-
ers is primarily responsible for the day to day management of the Managed In-
come 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.
Mark T. Rasimas began serving as the Short-Term Government Securities Fund's
portfolio manager in August 2000. Mr. Rasimas is a Vice President in U.S.
Trust's Fixed-Income division and has been with U.S. Trust since 1997. Prior to
joining U.S. Trust, Mr. Rasimas was a mortgage-backed securities analyst with
Thomson Financial and an investment banking analyst in the structured finance
group at NationsBanc Capital Markets, Inc. Mr. Rasimas is primarily responsible
for the day to day management of the Short-Term Government Securities 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 man-
agement 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 applica-
tion 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 en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.
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 proce-
dures, 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 corre-
spondence or questions regarding a Fund to your institution.
The Funds' distributor may institute promotional incentive programs for deal-
ers, 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
12
<PAGE>
-------------------------------------------------------------
compensation, including merchandise, airline vouchers, trips and vacation pack-
ages, to dealers selling shares of a Fund. If any such program is made avail-
able 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"). Presently, the only Busi-
ness Days on which the Adviser is closed and the NYSE is open are Veterans' Day
and Columbus 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 or-
der. 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 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 un-
reliable, fair value prices may be determined in good faith using methods ap-
proved by the Board of Directors. Fixed income investments with remaining matu-
rities 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 pur-
chase 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 in-
vestments 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 ac-
count number and sign the request.
If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness 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. Shares will not be redeemed by the Fund unless all required documents
have been received by the Fund.
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 institu-
tion may charge a fee for its services, in addition to the fees charged by the
Fund.
13
<PAGE>
-------------------------------------------------------------
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 re-
ceives your request in good order.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic with-
drawal 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 ac-
count (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 re-
quired 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 trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed. More information about this is in our Statement of Additional Informa-
tion.
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
certain portfolios of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year. We may
also reject any exchange request if we determine that the exchange would not be
in the best interests of the Fund or its shareholders. Shares can be exchanged
directly by mail, or by telephone if you previously selected the telephone ex-
change option on the account application.
You may also exchange shares through your financial institution. Exchange re-
quests 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 in-
structions, 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.
14
<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 pur-
chase, 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 trans-
mitting requests and delivering funds on a timely basis.
Shareholder Servicing
The Funds are permitted to pay an administrative 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 organiza-
tion.
Dividends and Distributions
Each Fund distributes its income by declaring a dividend daily and paying accu-
mulated 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 af-
filiates 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). 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 distribu-
tions will generally be taxable as ordinary income. You will be subject to in-
come tax on Fund distributions regardless whether they are paid in cash or re-
invested 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 ac-
count 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.
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 se-
curities 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 nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, 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 situa-
tion.
More information about taxes is in the Statement of Additional Information.
15
<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 sin-
gle 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
Ernst & Young LLP, independent public auditors. 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).
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................... $ 8.99 $ 9.17 $ 8.60 $ 8.84 $ 8.39 $ 8.57
------- ------- ------- ------- ------ ------
Income From Investment
Operations
Net Investment Income..... 0.47 0.46 0.49 0.51 0.55 0.51
Net Gains or (Losses) on
Securities (both realized
and unrealized).......... (0.41) 0.08 0.58 (0.24) 0.44 (0.18)
------- ------- ------- ------- ------ ------
Total From Investment
Operations............... 0.06 0.54 1.07 0.27 0.99 0.33
------- ------- ------- ------- ------ ------
Less Distributions
Dividends From Net
Investment Income........ (0.47) (0.46) (0.49) (0.51) (0.54) (0.51)
Dividends From Net
Realized Gain on
Investments.............. (0.03) (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 0.00
------- ------- ------- ------- ------ ------
Total Distributions....... (0.50) (0.72) (0.50) (0.51) (0.54) (0.51)
------- ------- ------- ------- ------ ------
Net Asset Value, End of
Year...................... $ 8.55 $ 8.99 $ 9.17 $ 8.60 $ 8.84 $ 8.39
======= ======= ======= ======= ====== ======
Total Return............... 0.72% 5.95% 12.79% 3.17% 11.86% 4.06%
Ratios/Supplemental Data
Net Assets, End of Period
(in millions)............ $220.48 $215.77 $196.10 $185.90 $88.90 $86.02
Ratio of Net Operating
Expenses to Average
Net Assets............... 0.88% 0.90% 0.90% 0.90% 0.96% 1.00%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/ ............... 1.00% 1.03% 1.02% 1.04% 1.12% 1.12%
Ratio of Net Investment
Income to Average
Net Assets............... 5.42% 4.96% 5.51% 5.90% 6.09% 6.09%
Portfolio Turnover Rate... 112.0% 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.
16
<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...................... $ 7.13 $ 7.23 $ 6.87 $ 7.06 $ 6.75 $ 6.83
------- ------- ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income....... 0.40 0.39 0.41 0.41 0.43 0.39
Net Gains or (Losses) on
Securities (both realized
and unrealized)............ (0.36) 0.04 0.36 (0.19) 0.31 (0.07)
------- ------- ------ ------ ------ ------
Total From Investment
Operations................. 0.04 0.43 0.77 0.22 0.74 0.32
------- ------- ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income.......... (0.40) (0.39) (0.41) (0.41) (0.43) (0.39)
Dividends From Net Realized
Gain on Investments........ 0.00 (0.13) 0.00 0.00 0.00 0.00
Distributions in Excess of
Net Realized Gain on
Investments................ 0.00 (0.01) 0.00 0.00 0.00 (0.01)
------- ------- ------ ------ ------ ------
Total Distributions......... (0.40) (0.53) (0.41) (0.41) (0.43) (0.40)
------- ------- ------ ------ ------ ------
Net Asset Value, End of
Period...................... $ 6.77 $ 7.13 $ 7.23 $ 6.87 $ 7.06 $ 6.75
======= ======= ====== ====== ====== ======
Total Return................. 0.59% 6.02% 11.37% 3.25% 11.13% 4.95%
Ratios/Supplemental Data
Net Assets, End of Period
(in millions).............. $155.48 $127.74 $94.94 $78.44 $68.64 $47.93
Ratio of Net Operating
Expenses to Average Net
Assets..................... 0.58% 0.60% 0.61% 0.63% 0.64% 0.66%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/ ................. 0.65% 0.67% 0.66% 0.68% 0.68% 0.68%
Ratio of Net Investment
Income to Average Net
Assets..................... 5.80% 5.29% 5.68% 5.91% 6.06% 5.91%
Portfolio Turnover Rate..... 122.0% 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.
17
<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........................ $ 7.04 $ 7.00 $ 6.93 $ 6.98 $ 6.89 $ 6.93
------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income......... 0.35 0.34 0.37 0.38 0.40 0.33
Net Gains or (Losses) on
Securities (both realized and
unrealized).................. (0.15) 0.04 0.07 (0.06) 0.09 (0.04)
------ ------ ------ ------ ------ ------
Total From Investment
Operations................... 0.20 0.38 0.44 0.32 0.49 0.29
------ ------ ------ ------ ------ ------
Less Distributions
Dividends From Net Investment
Income....................... (0.35) (0.34) (0.37) (0.37) (0.40) (0.33)
Dividends From Net Realized
Gain on Investments.......... $(0.02) 0.00 0.00 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 0.00
------ ------ ------ ------ ------ ------
Total Distributions........... (0.37) (0.34) (0.37) (0.37) (0.40) (0.33)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period........................ $ 6.87 $ 7.04 $ 7.00 $ 6.93 $ 6.98 $ 6.89
====== ====== ====== ====== ====== ======
Total Return................... 3.02% 5.54% 6.47% 4.77% 7.27% 4.30%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).................... $59.31 $52.59 $32.55 $30.80 $25.07 $25.22
Ratio of Net Operating
Expenses to Average Net
Assets....................... 0.54% 0.58% 0.62% 0.61% 0.61% 0.61%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/ ................... 0.62% 0.67% 0.69% 0.70% 0.80% 0.67%
Ratio of Net Investment Income
to Average Net Assets........ 5.07% 4.79% 5.28% 5.42% 5.72% 4.80%
Portfolio Turnover Rate....... 90.0% 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.
18
<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 fol-
lowing:
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
From the SEC: You can also obtain the SAI or the Annual and Semi-Annual re-
ports, 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 re-
quest documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section, Wash-
ington, 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>
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 August 1, 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 Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 2000 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
Treasury Money Fund................................................................. 2
Tax-Exempt Money and New York Tax-Exempt Money Funds................................ 2
Additional Information on Portfolio Instruments..................................... 4
Special Considerations Relating to New York Municipal Securities.................... 13
Investment Limitations.............................................................. 23
NET ASSET VALUE AND NET INCOME........................................................... 28
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................................... 29
Distributor......................................................................... 29
Purchase of Shares.................................................................. 30
Redemption Procedures............................................................... 30
Other Redemption Information........................................................ 32
INVESTOR PROGRAMS........................................................................ 33
Systematic Withdrawal Plan.......................................................... 33
Exchange Privilege.................................................................. 33
Retirement Plans.................................................................... 34
Automatic Investment Program........................................................ 34
Additional Information.............................................................. 35
DESCRIPTION OF CAPITAL STOCK............................................................. 35
MANAGEMENT OF THE FUNDS.................................................................. 37
Directors and Officers.............................................................. 37
Investment Advisory and Administration Agreements................................... 40
Shareholder Organizations........................................................... 44
Expenses............................................................................ 46
Custodian and Transfer Agent........................................................ 47
PORTFOLIO TRANSACTIONS................................................................... 47
INDEPENDENT AUDITORS..................................................................... 49
COUNSEL.................................................................................. 49
ADDITIONAL INFORMATION CONCERNING TAXES.................................................. 49
YIELD INFORMATION........................................................................ 51
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CODE OF ETHICS........................................................................... 53
MISCELLANEOUS............................................................................ 53
FINANCIAL STATEMENTS..................................................................... 54
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
-9-
<PAGE>
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
-10-
<PAGE>
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
-11-
<PAGE>
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.
-12-
<PAGE>
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
-13-
<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.
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
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<PAGE>
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).
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
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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 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-
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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.
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
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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 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
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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 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
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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.
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
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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 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
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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 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
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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 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
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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
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
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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;
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
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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 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;
-26-
<PAGE>
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;
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)
-27-
<PAGE>
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.
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
-28-
<PAGE>
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.
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.
-29-
<PAGE>
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 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
-30-
<PAGE>
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).
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.
-31-
<PAGE>
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 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.
-32-
<PAGE>
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
(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
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<PAGE>
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 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
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<PAGE>
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.
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 twenty-four 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
-35-
<PAGE>
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 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.
-36-
<PAGE>
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 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 Boards (since 1997),
Age: 69 President, Treasurer and Trustee (since 1995) of
Excelsior Funds and Excelsior Institutional Trust;
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).
Rodman L. Drake Director Director of the Companies (since 1996); Trustee of
Continuation Investments Group, Inc. Excelsior Institutional Trust and Excelsior Funds
1251 Avenue of the Americas (since 1994); Director, Parsons Brinkerhoff, Inc.
9/th/ Floor (engineering firm) (since 1995); President,
New York, NY 10020 Continuation Investments Group, Inc. (since 1997);
Age: 57 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. (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. (from 1993 to 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: 75 Institutional Trust (since 1995).
</TABLE>
____________________
/1/ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-37-
<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).
Morrill Melton Hall, Jr. Director Director of the Companies (since July 30, 2000); Trustee
Comprehensive Health Services, Inc. of Excelsior Institutional Trust (since July 30, 2000);
8229 Boone Blvd., Suite 700 Chief Executive Officer, Comprehensive Health Services,
Vienna, VA 22182 Inc. (health care management and administration).
Age: 55
Jonathan Piel Director Director of the Companies (since 1996); Trustee of
558 E. 87th Street Excelsior Institutional Trust and Excelsior Funds
New York, NY 10128 (since 1994); Vice President and Editor, Scientific
Age: 61 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: 74 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 Funds, Inc. and
Spring Hill, FL 34606 Excelsior Tax-Exempt Funds, Inc. (1991-1997) and
Age: 74 Excelsior 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
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57
</TABLE>
____________________________
/2/ 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>
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41
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: 39
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, Senior
Boston, MA 02108-3913 Manager of Fund Administration, Chase Global Funds
Age: 33 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 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000 from Excelsior
Institutional Trust plus a per-Company meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust 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 from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received $4,000 from Excelsior Funds plus a per-Company meeting
fee of $250 and each of these persons was reimbursed for expenses incurred in
attending meetings of Excelsior Funds. The Chairman of the Board of Excelsior
Funds received $5,000 per annum for services in such capacity. In addition,
Messrs. Drake, Piel and Robinson each receive $2,000 per annum for their
services on Excelsior Funds, Inc.'s Nominating Committee. 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 July 7, 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.
-39-
<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
Pension or from the
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***
Director $18,000 None None $22,000(3)**
Rodman L. Drake
Director $31,000 None None $38,750(4)**
Joseph H. Dugan
Director $33,000 None None $38,250(3)**
Wolfe J. Frankl
Director $30,000 None None $35,000(3)**
Jonathan Piel
Director $34,000 None None $42,000(4)**
Robert A. Robinson
Director $34,000 None None $39,500(3)**
Alfred C. Tannachion
Director $33,000 None None $38,250(3)**
Frederick S. Wonham
Chairman of the Board,
President and Treasurer $43,000 None None $52,000(4)**
</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.
*** Donald L. Campbell resigned from the Boards of the Companies on July 31,
2000.
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.
-40-
<PAGE>
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 $1,812,027 $1,475,748 $1,036,066
Government Money Fund $1,707,384 $1,381,779 $1,216,265
Treasury Money Fund $1,317,831 $1,403,045 $1,108,480
Tax-Exempt Money Fund $2,755,240 $2,696,982 $2,325,765
New York Tax-Exempt Money Fund $1,599,304 $ 277,593 $ 0
</TABLE>
-41-
<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 $1,182,749 $358,360 $231,368
Government Money Fund $ 273,569 $184,188 $168,737
Treasury Money Fund $ 100,084 $151,843 $ 82,614
Tax-Exempt Money Fund $1,009,060 $827,107 $627,413
New York Tax-Exempt Money Fund $ 39,686 $532,521 $ 0
</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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab
Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc. Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
CGFSC, Federated Services Company, 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. Prior to July 31,
-42-
<PAGE>
2000, Federated Administrative Services, a subsidiary of Federated Services
Company, served as the Funds' administrator. On July 31, 2000, Federated
Services Company assumed all of its subsidiaries' rights and obligations under
the Administration Agreement. 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, a
subsidiary of Federated Services Company, 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 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:
-43-
<PAGE>
<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 $1,822,501 $1,122,463 $ 11
Government Money Fund $1,206,118 $ 958,200 $172
Treasury Money Fund $ 719,231 $ 792,993 $ 0
Tax-Exempt Money $2,291,147 $2,156,742 $ 0
New York Tax-Exempt Money Fund $ 498,766 $ 248,317 $ 0
</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 $ 0 $ 775,667 $ 3
Government Money Fund $238 $ 847,526 $96
Treasury Money Fund $ 0 $ 607,458 $ 0
Tax-Exempt Money Fund $ 0 $1,807,345 $ 0
New York Tax-Exempt Money Fund $ 0 $ 0 $ 0
</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 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
-44-
<PAGE>
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.
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 $1,182,749 $1,182,726
Government Money Fund $ 273,807 $ 272,351
Treasury Money Fund $ 100,084 $ 100,083
Tax-Exempt Money Fund $1,009,060 $1,009,057
New York Tax-Exempt Money Fund $ 39,686 $ 39,676
</TABLE>
For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:
-45-
<PAGE>
Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
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
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
---------- --------------------------
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
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 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.
-46-
<PAGE>
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. 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.
-47-
<PAGE>
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 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.
-48-
<PAGE>
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 Money Fund held one corporate bond issued by Morgan Stanley
Dean Witter with a principal amount of $50,000,000 and commerical paper issued
by Goldman Sachs Group, Inc. with a principal amount of $75,000,000.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston, MA
02116 serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP 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
---------
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
-49-
<PAGE>
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."
The Tax-Exempt Funds are 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
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
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<PAGE>
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.
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
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<PAGE>
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 of the Money Fund, Government Money Fund, Treasury Money Fund,
Tax-Exempt Money Fund and New York Tax-Exempt Money Fund were 5.59%, 5.77%,
5.33%, 3.35% and 3.09%, respectively, and the effective yields for Retail Shares
of such respective Funds were 5.74%, 5.94%, 5.47%, 3.41% and 3.14%.
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%.
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<PAGE>
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, 2000 were 4.94% and 5.07%.
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 July 7, 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 such shares beneficially because they did not
have voting or investment discretion with respect to such Retail Shares.
As of July 7, 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:
Treasury Money Fund: Longitude, Inc., 660 Madison Avenue, New York, New York
10021, 5.65%; New York Tax-Exempt Money Fund: Sara Wilford, c/o United States
------------------------------
Trust Company of New York, 114 West 47/th/ Street, New York, New York 10036,
6.25%; Government Money Fund: Sweetheart Cup Company, Inc., Coll. Ac., c/o
United States Trust Company of New York, 114 West 47/th/ Street, New York,
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<PAGE>
New York 10036, 15.77%; and Hillside Capital Incorporated, c/o United States
Trust Company of New York, 114 West 47th Street, New York, New York, 10036,
5.32%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies' Annual
Reports to Shareholders for the fiscal year ended March 31, 2000 (the "2000
Annual Reports") for the Funds are incorporated in this Statement of Additional
Information by reference. No other parts of the 2000 Annual Reports are
incorporated by reference herein. The financial statements included in the 2000
Annual Reports for the Funds have been audited by the Companies' independent
auditors, Ernst & Young LLP, whose reports thereon also appear in the 2000
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 2000 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 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
A-1
<PAGE>
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.
A-2
<PAGE>
Fitch 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 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 minimal 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.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant 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.
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" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
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)
A-6
<PAGE>
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 ratings used by Fitch 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.
A-7
<PAGE>
"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
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-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.
"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.
A-9
<PAGE>
"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.
"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.
A-10
<PAGE>
"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 uses 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 Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 2000 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........................... 18
Distributor..................................................... 18
Purchase of Shares.............................................. 19
Redemption Procedures........................................... 20
Other Redemption Information.................................... 21
INVESTOR PROGRAMS........................................................ 21
Systematic Withdrawal Plan...................................... 21
Exchange Privilege.............................................. 22
Retirement Plans................................................ 23
Automatic Investment Program.................................... 23
Additional Information.......................................... 24
DESCRIPTION OF CAPITAL STOCK............................................. 24
MANAGEMENT OF THE FUNDS.................................................. 26
Directors and Officers.......................................... 26
Investment Advisory and Administration Agreements............... 31
Shareholder Organizations....................................... 34
Expenses........................................................ 36
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 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.
-1-
<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
-2-
<PAGE>
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
-3-
<PAGE>
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 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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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 bear the expenses of the Fund and the other
investment company, some or all of which would be
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<PAGE>
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.
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
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<PAGE>
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.
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) 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)
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<PAGE>
the Large Cap Growth and Technology Funds may lend portfolio securities in
accordance with their investment objectives 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 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
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<PAGE>
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.
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.
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<PAGE>
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
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
-16-
<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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).
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
-20-
<PAGE>
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 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;
-21-
<PAGE>
(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.
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
-22-
<PAGE>
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
. 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
-23-
<PAGE>
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.
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
-24-
<PAGE>
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 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.
-25-
<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
238 June Road Board, President 1997) and President, Treasurer and Director
Stamford, CT 06903 and Treasurer (since 1995) of the Company and Excelsior
Age: 69 Tax-Exempt Funds, Inc.; Chairman of the
Boards (since 1997), President, Treasurer
and Trustee (since 1995) of Excelsior
Funds and Excelsior Institutional Trust;
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).
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 Trustee of Excelsior Institutional Trust
9th Floor and Excelsior Funds (since 1994); Director,
New York, NY 10020 Parsons Brinkerhoff, Inc. (engineering
Age: 57 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. (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.
(from 1993 to 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).
</TABLE>
____________________
1 This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-26-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Joseph H. Dugan Director Retired; Director of the Company and
913 Franklin Lake Road Excelsior Tax-Exempt Fund (since 1984);
Franklin Lakes, NJ 07417 Director of UST Master Variable Series,
Age: 75 Inc. (from 1994 to June 1997); and Trustee
of Excelsior Institutional Trust (since
1995).
Wolfe J. Frankl Director Retired; Director of the Company and
2320 Cumberland Road Excelsior Tax-Exempt Funds, Inc. (since
Charlottesville, VA 22901-7726 1986); Director of UST Master Variable
Age: 79 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).
Morrill Melton Hall, Jr. Director Director of the Company and Excelsior
Comprehensive Health Services, Inc. Tax-Exempt Funds, Inc. (since July 30, 2000);
8229 Boone Blvd., Suite 700 Trustee of Excelsior Institutional Trust
Vienna, VA 22182 (since July 30, 2000); Chief Executive Officer,
Age: 55 Comprehensive Health Services, Inc. (health
care management and administration).
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: 61 and Excelsior Funds (since 1994); 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);
445 Fifth Avenue Director of UST Master Variable Series,
New York, NY 10016 Inc. (from 1994 to June 1997); Trustee of
Age: 74 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).
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
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 Company
Age: 74 and Excelsior Tax-Exempt Funds, Inc.
(1991-1997) and Excelsior Institutional
Trust (1996-1997); President and Treasurer
of Excelsior Funds, Inc. 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.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57
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: 41
Eddie Wang Assistant Manager of Blue Sky Compliance, Chase
Chase Global Funds Secretary Global Funds Services Company (November
Services Company 1996 to present); and Officer and Manager
73 Tremont Street of Financial Reporting, Investors Bank &
Boston, MA 02108-3913 Trust Company (January 1991 to November
Age: 39 1996).
Patricia M. Leyne Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (sine August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 33 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>
______________________
2 This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-28-
<PAGE>
Each director receives an annual fee of $9,000 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000 from Excelsior
Institutional Trust plus a meeting fee of $1,500 from each of Excelsior Funds,
Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from Excelsior Institutional
Trust 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 from each of the foregoing Companies for services in
such capacity. Prior to December 1999, each of Messrs. Drake, Piel and Wonham
received $4,000 from Excelsior Funds plus a per-Company meeting fee of $250 and
each of these persons was reimbursed for expenses incurred in attending meetings
of Excelsior Funds. The Chairman of the Board of Excelsior Funds received $5,000
per annum for services in such capacity. In addition, Messrs. Drake, Piel and
Robinson each receive $2,000 per annum for their services on the Company's
Nominating Committee. 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 July 7, 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.
-29-
<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 $ 9,000 None None $22,000(3)**
Rodman L. Drake
Director $15,500 None None $38,750(4)**
Joseph H. Dugan
Director $16,500 None None $38,250(3)**
Wolfe J. Frankl
Director $15,000 None None $35,000(3)**
Jonathan Piel
Director $17,000 None None $42,000(4)**
Robert A. Robinson
Director $17,000 None None $39,500(3)**
Alfred C. Tannachion
Director $16,500 None None $38,250(3)**
Frederick S. Wonham
Chairman of the Board,
President and Treasurer $21,500 None None $52,000(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.
*** Donald L. Campbell resigned as a director of the Companies as of July 31,
2000.
-30-
<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 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. For services
provided to the Blended Equity Fund, the Adviser is entitled, as of August 1,
2000, to a fee computed daily and paid monthly, at the annual rate of 0.75% of
average daily net assets on assets up to $1 billion; 0.70% of average daily net
assets on the next $500 million; and 0.65% of average daily net assets on assets
of $1.5 billion or more. Prior to August 1, 2000, the Adviser was entitled to
receive a fee computed daily and paid monthly, at the annual rate of 0.75% of
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 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 $5,744,728 $4,320,430 $3,139,705
Value and Restructuring Fund $3,997,358 $2,624,874 $1,163,708
Small Cap Fund $ 279,608 $ 241,815 $ 320,547
Large Cap Growth Fund $2,299,892 $ 803,946 $ 65,472
</TABLE>
-31-
<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 $379,382 $360,040 $332,044
Value and Restructuring Fund $829,279 $639,405 $ 84,739
Small Cap Fund $ 67,988 $ 51,882 $ 41,845
Large Cap Growth Fund $178,145 $ 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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
-32-
<PAGE>
CGFSC, Federated Services Company (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. Until July 31, 2000, Federated Services Company's
subsidiary, Federated Administrative Services, served as the Company's
administrator. On July 31, 2000, Federated Services Company assumed all of its
subsidiary's rights and obligations under the Administration Agreement. 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, a
subsidiary of Federated Services Company, 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.
-33-
<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 $1,238,650 $ 952,859 $ 707,403
Value and Restructuring Fund $1,034,523 $ 712,300 $ 315,023
Small Cap Fund $ 74,865 $ 74,865 $ 92,358
Large Cap Growth Fund $ 485,030 $ 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 $ 3,789 $ 1,957 $ 834
Value and Restructuring Fund $190,210 $120,091 $ 3,331
Small Cap Fund $ 24 $ 28 $ 52
Large Cap Growth Fund $ 17,645 $ 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 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
-34-
<PAGE>
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.
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>
Blended Equity Fund $ 383,171 $ 357,558
Value and Restructuring Fund $1,019,489 $ 269,466
Small Cap Fund $ 68,012 $ 67,857
Large Cap Growth Fund $ 195,790 $ 117,152
</TABLE>
-35-
<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; 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.
-36-
<PAGE>
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.
-37-
<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
Total Transaction on
Brokerage % of Total which
Total Commissions Commissions Commissions
Brokerage Paid to Paid to UST were paid to
Commissions Affiliated Securities UST Securities
Paid Persons Corp./1/ Corp./1/
---- ------- -------- --------
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 2000:
--------------------------------
Blended Equity Fund $287,171 $0 0 0
Value and Restructuring Fund $994,939 $0 0 0
Small Cap Fund $138,144 $0 0 0
Large Cap Growth Fund $153,754 $0 0 0
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
% of Total
Amount of
Total Transaction on
Brokerage % of Total which
Total Commissions Commissions Commissions
Brokerage Paid to Paid to UST were paid to
Commissions Affiliated Securities UST 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 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 were as
follows:
Fund Amount of Transactions Related Commission
---- ---------------------- ------------------
Blended Equity Fund $287,171 $ 1,037
Value and Restructuring Fund $994,939 $266,103
Small Cap Fund $138,144 $ 36,981
Large Cap Growth Fund $153,754 $ 13,758
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
-40-
<PAGE>
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: The Large Cap Fund held
130,000 shares of common stock of Morgan Stanley Dean Witter & Co.; the Blended
Equity Fund held 465,388 shares of common stock of Morgan Stanley Dean Witter &
Co. and 29,687 shares of common stock of Bank of America Corp.; and the Value
and Restructuring Fund held 315,000 shares of common stock of Morgan Stanley
Dean Witter & Co. and 260,000 shares of common stock of Chase Manhattan Corp.
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 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
-41-
<PAGE>
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
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street,
Boston, MA 02116 , serve as auditors of the Company. The Funds' Financial
Highlights included in the Prospectus and the financial statements for the
period ended March 31, 2000 are incorporated by reference in this Statement of
Additional Information have been audited by Ernst Young LLP, 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
-42-
<PAGE>
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:
-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 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:
-44-
<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 22.90% 25.52% 18.75%
Value and Restructuring Fund* 42.41% 28.79% N/A
Small Cap Fund* 65.91% 12.33% N/A
Large Cap Growth Fund** 32.73% 49.04% N/A
</TABLE>
____________________________
* Commenced operations on December 31, 1992
** Commenced operations on October 1, 1997
Based on the foregoing calculations, the aggregate annual
total returns for each Fund other than the Technology Fund for the 5-year,
10-year and since inception periods ended March 31, 2000, were as follows:
<TABLE>
<CAPTION>
Aggregate Annual Total Returns
For the Since
For the 5 Years Ended For the 10 Years Ended Inception Period Ended
3/31/00 3/31/00 3/31/00
--------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Blended Equity Fund 211.53% 457.46% 1110.59%
Value and Restructuring Fund* 254.30% N/A 449.93%
Small Cap Fund* 78.83% N/A 157.47%
Large Cap Growth Fund N/A N/A 171.14%
</TABLE>
* Commenced operations on December 31, 1992.
** Commenced operations on October 1, 1997.
-45-
<PAGE>
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 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
-46-
<PAGE>
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, 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 July 7, 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 July 7, 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 47/th/
Street, New York, New York 10036, 8.86%; 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, 5.47%; VALUE AND
---------
-47-
<PAGE>
RESTRUCTURING FUND: Charles Schwab & Co., Inc., Special Custody A/C for Attn:
------------------
Mutual Funds, 101 Montgomery Street, San Francisco, California 94104, 27.59%,
SMALL CAP FUND U.S. Trust Retirement Fund, c/o United States Trust Company of
--------------
New York, 114 West 47/th/ Street, New York, New York 10036, 10.83%; TECHNOLOGY
----------
FUND: U.S. Trust Retirement Fund, c/o United States Trust Company of New York,
----
114 West 47/th/ Street, New York, New York 10036, 16.61%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the
Company's Annual Report to Shareholders for the fiscal year ended March 31, 2000
(the "2000 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 2000 Annual Report are incorporated by reference herein. The
financial statements included in the 2000 Annual Report for the Funds have been
audited by the Company's independent auditors, Ernst & Young LLP, whose reports
thereon also appear in the 2000 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 2000 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 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
A-1
<PAGE>
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.
A-2
<PAGE>
Fitch 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 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 minimal 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.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant 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.
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" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
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)
A-6
<PAGE>
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 ratings used by Fitch 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.
A-7
<PAGE>
"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
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-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.
"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.
A-9
<PAGE>
"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.
"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.
A-10
<PAGE>
"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 uses 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 Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 2000 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
Foreign Investment Risks............................................. 1
Additional Investment Policies....................................... 4
Additional Information on Portfolio Instruments...................... 7
Investment Limitations............................................... 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 23
Distributor.......................................................... 23
Purchase of Shares................................................... 24
Redemption Procedures................................................ 25
Other Redemption Information......................................... 26
INVESTOR PROGRAMS......................................................... 26
Systematic Withdrawal Plan........................................... 26
Exchange Privilege................................................... 27
Retirement Plans..................................................... 28
Automatic Investment Program......................................... 28
Additional Information............................................... 29
DESCRIPTION OF CAPITAL STOCK.............................................. 29
MANAGEMENT OF THE FUNDS................................................... 31
Directors and Officers............................................... 31
Investment Advisory and Administration Agreements.................... 36
Shareholder Organizations............................................ 39
Expenses............................................................. 41
Custodian and Transfer Agent......................................... 41
PORTFOLIO TRANSACTIONS.................................................... 42
PORTFOLIO VALUATION....................................................... 45
INDEPENDENT AUDITORS...................................................... 45
COUNSEL................................................................... 45
ADDITIONAL INFORMATION CONCERNING TAXES................................... 46
Generally............................................................ 46
PERFORMANCE INFORMATION................................................... 47
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CODE OF ETHICS............................................................ 50
MISCELLANEOUS............................................................. 50
FINANCIAL STATEMENTS...................................................... 51
APPENDIX A................................................................ A-1
</TABLE>
-ii-
<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.
Governments of some developing countries exercise substantial
influence over many aspects of the private sector. In some countries, the
government owns or controls many
-1-
<PAGE>
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 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.
-2-
<PAGE>
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
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
-4-
<PAGE>
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.
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
-5-
<PAGE>
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 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.
-6-
<PAGE>
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 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
-7-
<PAGE>
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.
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
-8-
<PAGE>
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 Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered to be loans by a Fund under
the 1940 Act.
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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.
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.
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
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<PAGE>
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 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
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<PAGE>
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.
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
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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 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
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<PAGE>
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.
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
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<PAGE>
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
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.
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<PAGE>
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 (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
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<PAGE>
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 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.
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<PAGE>
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.
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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<PAGE>
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 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
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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;
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
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<PAGE>
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.
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
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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:
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.
-22-
<PAGE>
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
-----------
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
-23-
<PAGE>
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.
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."
-24-
<PAGE>
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).
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.
-25-
<PAGE>
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.
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;
-26-
<PAGE>
(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.
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. However, certain exchanges are
subject to a 2% redemption fee. See "Redemption Procedures." 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
-27-
<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 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
-28-
<PAGE>
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.
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.
-29-
<PAGE>
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 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.
-30-
<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 (since 1995) of the Company and
Age: 69 Excelsior Tax-Exempt Funds, Inc.; Chairman
of the Boards (since 1997), President,
Treasurer and Trustee (since 1995) of
Excelsior Funds and Excelsior Institutional
Trust; 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).
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 of Excelsior Institutional Trust
New York, NY 10020 and Excelsior Funds (since 1994);
Age: 57 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, Hotelvision, Inc. (since 1999);
Director, Alliance Group Services, Inc.
(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
</TABLE>
_______________________________
/1/ This director is considered to be an "interested person" of the Company
as difined in the 1940 Act.
-31-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
---------------- ------- ----------------------
<S> <C> <C>
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: 75 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).
Morrill Melton Hall, Jr. Director Director of the Company and Excelsior
Comprehensive Health Services, Inc. Tax-Exempt Funds, Inc. (since July 30, 2000);
8229 Boone Blvd., Suite 700 Trustee of Excelsior Institutional Trust
Vienna, VA 22182 (since July 30, 2000); Chief Executive Officer,
Age: 55 Comprehensive Health Services, Inc. (health care
management and administration).
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: 61 and Excelsior Funds (since 1994); 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);
445 Fifth Avenue Director of UST Master Variable Series,
New York, NY 10016 Inc. (from 1994 to June 1997); Trustee of
Age: 74 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).
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
---------------- ------- ----------------------
<S> <C> <C>
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: 57
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: 41
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 and Manager
73 Tremont Street of Financial Reporting, Investors Bank &
Boston, MA 02108-3913 Trust Company (January 1991 to November
Age: 39 1996).
</TABLE>
__________________
/2/ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-33-
<PAGE>
<TABLE>
<CAPTION>
Position with the Principal Occupation During Past 5 years
Name and Address Company and Other Affiliations
---------------- ------- ----------------------
<S> <C> <C>
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: 33 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 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000 from Excelsior
Institutional Trust plus a meeting fee of $1,500 from each of Excelsior Funds,
Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from Excelsior Institutional
Trust 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 from each of the foregoing Companies for services in
such capacity. Prior to December 1999, each of Messrs. Drake, Piel and Wonham
received $4,000 from Excelsior Funds plus a per-Company meeting fee of $250 and
each of these persons was reimbursed for expenses in attending meetings of
Excelsior Funds. The Chairman of the Board of Excelsior Funds received $5,000
per annum for services in such capacity. In addition, Messrs. Drake, Piel and
Robinson each receive $2,000 per annum for their services on the Company's
Nominating Committee. 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 July 7, 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.
-34-
<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*** $ 9,000 None None $22,000 (3)**
Director
Rodman L. Drake $15,500 None None $38,750 (4)**
Director
Joseph H. Dugan $16,500 None None $38,250 (3)**
Director
Wolfe J. Frankl $15,000 None None $35,000 (3)**
Director
Jonathan Piel $17,000 None None $42,000 (4)**
Director
Robert A. Robinson $17,000 None None $39,500 (3)**
Director
Alfred C. Tannachion $16,500 None None $38,250 (3)**
Director
Frederick S. Wonham $21,500 None None $52,000 (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.
*** Donald L. Campbell resigned as a director of the Companies on
July 31, 2000.
-35-
<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 $2,603,367 $1,935,661 $1,591,051
Latin America Fund $ 157,606 $ 374,039 $ 870,385
Pacific/Asia Fund $ 578,324 $ 255,375 $ 686,528
Pan European Fund $1,404,984 $1,868,811 $1,536,067
Emerging Markets Fund $ 82,834 $ 62,908 $ 3,355
</TABLE>
-36-
<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 $295,860 $203,778 $134,671
Latin America Fund $ 18,635 $ 40,751 $ 94,398
Pacific/Asia Fund $ 56,097 $ 26,291 $ 67,740
Pan European Fund $ 94,989 $142,822 $119,690
Emerging Markets Fund $ 36,469 $ 11,666 $ 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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
CGFSC, Federated Services Company (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. Until July 31, 2000, Federated Services Company's subsidiary,
Federated Administrative Services, served as
-37-
<PAGE>
administrator of the Company. On July 31, 2000, Federated Services Company
assumed all of its subsidiary's rights and obligations under the Administration
Agreement. 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, a
subsidiary of Federated Services Company 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 $579,280 $427,509 $344,846
Latin America Fund $ 33,846 $ 81,572 $190,906
Pacific/Asia Fund $124,990 $ 56,059 $150,789
Pan European Fund $297,627 $397,805 $330,551
Emerging Markets Fund $ 19,041 $ 11,814 $ 1,957
</TABLE>
-38-
<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 $ 565 $ 379 $344,846
Latin America Fund $1,441 $1,386 $190,906
Pacific/Asia Fund $1,439 $ 274 $150,789
Pan European Fund $2,368 $4,522 $330,551
Emerging Markets Fund $ 0 $ 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.
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").
-39-
<PAGE>
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 $296,425 $292,668
Latin America Fund $ 20,076 $ 13,070
Pacific/Asia Fund $ 57,536 $ 46,289
Pan European Fund $ 96,428 $ 85,585
Emerging Markets Fund $ 8,098 $ 8,098
</TABLE>
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
---------- -------------
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
-40-
<PAGE>
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
---------- -------------
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
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.
-41-
<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 requirements of the 1940 Act. The
Adviser may also take into account the sale of Fund shares in allocating
brokerage transactions.
-42-
<PAGE>
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............................... $746,459 $562,633 $456,367
Latin America Fund............................... $ 81,899 $198,226 $529,715
Pacific/Asia Fund................................ $668,524 $257,407 $470,122
Pan/European Fund................................ $383,252 $563,583 $384,700
Emerging Markets Fund............................ $ 57,760 $ 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 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.
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:
Fund Amount of Transactions Related Commission
---- ---------------------- ------------------
International Fund $731,390 $12,903
Latin America Fund $ 81,899 $14,632
Pacific/Asia Fund $668,524 $31,107
Pan European Fund $378,832 $ 1,162
Emerging Markets Fund $ 57,760 $ 431
-43-
<PAGE>
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.
-44-
<PAGE>
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 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
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston
MA 02116 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, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP 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.
-45-
<PAGE>
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 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."
-46-
<PAGE>
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. 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.
-47-
<PAGE>
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:
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 until
3/31/00 3/31/00 3/31/00
--------------------- ---------------------------------------------------
<S> <C> <C> <C>
International Fund 60.30% 17.42% 9.80%
Latin America Fund 54.52% 8.87% 5.06%
Pacific/Asia Fund 79.88% 8.85% 11.06%
Pan European Fund 42.77% 21.33% 17.23%
Emerging Markets Fund* 82.77% N/A N/A
</TABLE>
*Commenced operation on January 2, 1998
Based on the foregoing calculations, the aggregate 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:
-48-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annual Total Returns
For the Period from
Commencement of
For the 5-Years For the 10 Years Operations until
Ended 3/31/00 Ended 3/31/00 3/31/00
----------------- ------------------ ---------------------
<S> <C> <C> <C>
International Fund 123.19% 154.59% 230.50%
Latin America Fund 52.93% N/A 43.04%
Pacific/Asia Fund 52.88% N/A 57.96%
Pan European Fund 162.90% N/A 216.51%
Emerging Markets Fund* N/A N/A 7.46%
</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.
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
-49-
<PAGE>
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 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
-50-
<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 July 7, 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 July 7, 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 was as follows: INTERNATIONAL FUND: U.S. Trust Retirement Fund, c/o
------------------
United States Trust Company of New York, 114 West 47/th/ Street, New York, New
York 10036, 7.34%; LATIN AMERICA FUND: U.S. Trust Retirement Fund, c/o United
------------------
States Trust Company of New York, 114 West 47/th/ Street, New York, New York
10036, 5.82%; Charles Schwab & Co. Inc., Special Custody A/C for, Attn: Mutual
Funds, 101 Montgomery Street, San Francisco, California 94104, 6.87%; EMERGING
--------
MARKETS FUND: U.S. Trust Retirement Fund, c/o United States Trust Company of New
------------
York, 114 West 47/th/ Street, New York, New York 10036, 12.71%; Dan G. Weiden,
IMA, c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York, 10036, 5.16%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Report") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the 2000 Annual Report
are incorporated by reference herein. The financial statements included in the
2000 Annual Report for the Funds have been audited by the Company's independent
auditors, Ernst & Young LLP whose reports thereon also appear in the 2000 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
2000 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.
-51-
<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
are also distinguished
A-1
<PAGE>
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.
A-2
<PAGE>
Fitch 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 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 minimal 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.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant 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.
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" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
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)
A-6
<PAGE>
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 ratings used by Fitch 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.
A-7
<PAGE>
"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
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-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.
"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.
A-9
<PAGE>
"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.
"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.
A-10
<PAGE>
"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 uses 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 Ernst & Young
LLP, independent auditors, contained in the annual report to the Funds'
shareholders for the fiscal year ended March 31, 2000 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
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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................................................................................. 24
MANAGEMENT OF THE FUNDS...................................................................................... 27
Directors and Officers.............................................................................. 27
Investment Advisory and Administration Agreements................................................... 31
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
CODE OF ETHICS............................................................................................... 48
MISCELLANEOUS................................................................................................ 48
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FINANCIAL STATEMENTS......................................................................................... 48
APPENDIX A................................................................................................... A-1
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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
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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.
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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.
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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.
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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 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
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<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
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<PAGE>
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
-------------------
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.
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<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 issuers which deal in real estate and may purchase securities
which are secured by interests in
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<PAGE>
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:
1. Purchase securities on margin, make short sales of securities, or
maintain a short position;
2. Invest in companies for the purpose of exercising management or
control; and
3. 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:
1. 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;
2. 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
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<PAGE>
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;
3. 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;
4. 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
5. 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:
1. Purchase securities on margin, make short sales of securities, or
maintain a short position;
2. Invest in companies for the purpose of exercising management or
control; and
3. 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.
For the purpose of Investment Limitation Nos. 4 and 13, the
prohibition of
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<PAGE>
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-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several
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<PAGE>
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 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
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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 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.
-21-
<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 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 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
. Keogh Plans for self-employed individuals.
-23-
<PAGE>
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.
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
-24-
<PAGE>
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 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
-25-
<PAGE>
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
238 June Road Board, President 1997), and President, Treasurer and
Stamford, CT 06903 and Treasurer Director (since 1995) of the Company and
Age: 69 Excelsior Tax-Exempt Funds, Inc. Chairman of
the Boards (since 1997); President, Treasurer
and Trustee (since 1995) of Excelsior Funds and
Excelsior Institutional Trust; 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).
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 Trustee of Excelsior Institutional Trust
9/th/ Floor and Excelsior Funds (since 1994); Director,
New York, NY 10020 Parsons Brinkerhoff, Inc. (engineering
Age: 57 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, Hotelvision, Inc. (since
1999); Director, Alliance Group Services,
Inc. (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.
(from 1993 to 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).
</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>
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: 75 Series, Inc. (from 1994 to June 1997); and
Trustee of Excelsior Institutional Trust
(since 1995).
Wolfe J. Frankl Director Retired; Director of the Company and
2320 Cumberland Road Excelsior Tax-Exempt Funds, Inc. (since
Charlottesville, VA 22901-7726 1986); Director of UST Master Variable
Age: 79 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).
Morrill Melton Hall, Jr. Director Director of the Company and Excelsior Tax-Exempt
Comprehensive Health Services, Inc. Funds, Inc. (since July 30, 2000); Trustee of
8229 Boone Blvd., Suite 700 Excelsior Institutional Trust (since July 30, 2000);
Vienna, VA 22182 Chief Executive Officer, Comprehensive Health
Age: 55 Services, Inc. (health care management and
administration).
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: 61 and Excelsior Funds (since 1994); 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);
800 Second Avenue Director of UST Master Variable Series,
New York, NY 10017 Inc. (from 1994 to June 1997); Trustee of
Age: 74 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).
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
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 Company
Age: 74 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
One Logan Square Biddle & Reath LLP.
18/th/ & Cherry Streets
Philadelphia, PA 19103-6996
Age: 57
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18/th/ & Cherry Streets
Philadelphia, PA 19103-6996
Age: 41
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 and Manager
73 Tremont Street of Financial Reporting, Investors Bank &
Boston, MA 02108-3913 Trust Company (January 1991 to November
Age: 39 1996).
Patricia M. Leyne Assistant Secretary Vice President, Senior Manager of Fund
Chase Global Funds 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: 33 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>
_________________
/2/ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.
-29-
<PAGE>
Each director of the Company receives an annual fee of $9,000 from
each of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000
from Excelsior Institutional Trust plus a meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust 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 from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received $4,000 from Excelsior Funds plus a per-Company meeting
fee of $250 and each of these persons was reimbursed for expenses incurred in
attending meetings of Excelsior Funds. The Chairman of the Board of Excelsior
Funds received $5,000 per annum for services in such capacity. In addition,
Messrs. Drake, Piel and Robinson each receive $2,000 per annum for their
services on the Company's Nominating Committee. 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 July 7, 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***
Director $ 9,000 None None $22,000(3)**
Rodman L. Drake
Director $15,500 None None $38,750(4)**
Joseph H. Dugan
Director $16,500 None None $38,250(3)**
Wolfe J. Frankl
Director $15,000 None None $35,000(3)**
Jonathan Piel
Director $17,000 None None $42,000(4)**
Robert A. Robinson
Director $17,000 None None $39,500(3)**
Alfred C. Tannachion
Director $16,500 None None $38,250(3)**
Frederick S. Wonham
Chairman of the Board,
President and Treasurer $21,500 None None $52,000(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.
*** Donald L. Campbell resigned as a director of the Companies on July 31,
2000.
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
-31-
<PAGE>
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 $276,345 $219,983 $225,193
Real Estate Fund $269,174 $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 $48,015 $51,882 $30,724
Real Estate Fund $72,449 $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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
CGFSC, Federated Services Company (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. Prior to July 31, 2000, Federated Services Company's subsidiary,
Federated Administrative Services, served as administrator to the Company. On
July 31, 2000, Federated Services Company assumed all of its subsidiary's rights
and obligations under the Administration Agreement. Under the Administration
Agreement, the Administrators have agreed to maintain office facilities for
-33-
<PAGE>
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, a
subsidiary of Federated Services Company, 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>
Energy and Natural
Resources Fund $71,350 $59,511 $63,037
Real Estate Fund $52,195 $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>
Energy and Natural
Resources Fund $10,907 $ 7,177 $ 2,222
Real Estate Fund $ 46 $ 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.
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
-35-
<PAGE>
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 $58,922 $14,480
Real Estate Fund $32,706 $32,440
</TABLE>
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
---------- --------------------------
Energy and Natural Resources Fund $48,699 $15,896
Real Estate Fund $37,486 $37,231
-36-
<PAGE>
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
---------- --------------------------
Energy and Natural Resources Funds $29,091 $21,008
Real Estate Fund $ 1,794 $ 1,794
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>
Total % of Total
Brokerage Amount of
Total Commissions % of Total Transaction on
Brokerage Paid to Commission which 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 $334,065 $ 0 0 0
Real Estate Fund $ 60,959 $ 0 0 0
Fiscal year ended March 31, 1999:
--------------------------------
Energy and Natural Resources Fund $199,479 $ 0 0 0
Real Estate Fund $ 61,187 $ 0 0 0
Fiscal year ended March 31, 1998:
--------------------------------
Energy and Natural Resources Fund $122,934 $ 630 0.51% 0.62%
Real Estate Fund $103,563 $ 0 0 0
</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 $334,065 $55,444
Real Estate Fund $ 60,959 $17,748
</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
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Company. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP 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 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
-42-
<PAGE>
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>
Average Annual Total Returns
<TABLE>
<CAPTION>
For the Period from
For the Year Ended For the 5 Years December 31, 1992 until
3/31/00 Ended 3/31/00 3/31/00
------------------ --------------- -----------------------
<S> <C> <C> <C>
Energy and Natural Resources 44.61% 19.37% 15.60%/1/
Fund
Real Estate Fund 0.58% N/A (6.38)%/2/
</TABLE>
/1/ Commenced operation on December 31, 1992.
/2/ Commenced operation on October 1, 1997.
Based on the foregoing calculations, the aggregate annual total
returns for the Funds were as follows:
Aggregate Annual Total Returns
<TABLE>
<CAPTION>
For the Period from
For the 5 Years Commencement of
Ended 3/31/00 Operations until 3/31/00
--------------- ------------------------
<S> <C> <C>
Energy and Natural 147.40% 186.20%/1/
Resources Fund
Real Estate Fund N/A (15.20)%/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
-45-
<PAGE>
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, 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.
-46-
<PAGE>
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 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
6.48%.
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
-47-
<PAGE>
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 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 July 7, 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 July 7, 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: ENERGY AND NATURAL RESOURCES FUND: Charles Schwab &
---------------------------------
Co., Inc., Special Custody A/C for, Attn: Mutual Funds, 101 Montgomery Street,
San Francisco, California 94104, 18.88%; REAL ESTATE FUND: U.S. Trust Retirement
----------------
Fund, c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York, 10036, 12.20%; and Eugene Higgins Residuary, c/o United States
Trust Company of New York, 114 West 47/th/ Street, New York, New York, 10036,
7.30%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Report")
-48-
<PAGE>
for the Funds are incorporated in this Statement of Additional Information by
reference. No other parts of the 2000 Annual Report are incorporated by
reference herein. The financial statements included in the 2000 Annual Report
for the Funds have been audited by the Company's independent auditors, Ernst &
Young LLP whose reports thereon also appear in the 2000 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 2000
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
are also distinguished
A-1
<PAGE>
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.
A-2
<PAGE>
Fitch 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 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 minimal 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.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant 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.
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" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
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)
A-6
<PAGE>
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 ratings used by Fitch 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.
A-7
<PAGE>
"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
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-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.
"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.
A-9
<PAGE>
"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.
"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.
A-10
<PAGE>
"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 uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-11
<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 Ernst & Young LLP,
independent auditors, contained in the annual reports to the Funds' shareholders
for the fiscal year ended March 31, 2000 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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
CODE OF ETHICS............................................................ 52
MISCELLANEOUS............................................................. 53
FINANCIAL STATEMENTS...................................................... 53
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.
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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.
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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.
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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 Obligations depend upon a variety
of factors, including general money market conditions, the
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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 funds, the proceeds of bond
placements or other revenues. In addition, each Fund may invest in
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<PAGE>
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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<PAGE>
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 that the
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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 security. Each Fund may purchase
securities which are not registered under the Securities Act of
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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 equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will
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<PAGE>
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 equiptment 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. The portfolio turnover of the Intermediate-Term Managed Income Fund
decreased from 229% in 1999 to 122% in 2000; the portfolio turnover of the
Managed Income Fund decreased from 268% in 1999 to 112% in 2000; the portfolio
turnover of the Short-Term Tax-Exempt Securities Fund increased from 47% in 1999
to 130% in 2000. The decreases in the Intermediate-Term Managed Income and
Managed Income Funds occurred because of fewer investment opportunities in 2000.
The increase in the Short-Term Tax-Exempt Securities Fund occurred because the
portfolio was restructured to eliminate certain longer term instruments in favor
of shorter maturity instruments.
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
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<PAGE>
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;
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.
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<PAGE>
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.
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
-18-
<PAGE>
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.
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;
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<PAGE>
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 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.
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<PAGE>
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.
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
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<PAGE>
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 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
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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 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.
-23-
<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
-24-
<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;
-25-
<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 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
-26-
<PAGE>
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 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
-27-
<PAGE>
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 (since
Stamford, CT 06903 1995) of the Companies; Chairman of the Board
Age: 69 (since 1997), and President, Treasurer and
Trustee (since 1995) of Excelsior Funds and
Institutional Trust; 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).
</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>
Rodman L. Drake Director Director of the Companies (since 1996); Trustee
Continuation Investments Group, of Excelsior Institutional Trust and Excelsior
Inc. Funds (since 1994); Director, Parsons
1251 Avenue of the Americas, Brinkerhoff, Inc. (engineering firm) (since
9/th/ Floor 1995); President, Continuation Investments
New York, NY 10020 Group, Inc. (since 1997); President, Mandrake
Age: 57 Group (investment and consulting firm)
(1994-1997); Chairman, MetroCashcard
International, Inc. (since 1999); Director,
Hotelivision, Inc. (since 1999); Director,
Alliance Group Services, Inc. (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. (from 1993 to 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: 75
Excelsior Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of the Companies (since
2320 Cumberland Road 1986); Director of UST Master Variable Series,
Charlottesville, VA 22901-7726 Inc. (from 1994 to June 1997); Trustee of
Age: 79 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>
-29-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
---------------- ------------- -----------------------------------
<S> <C> <C>
Morrill Melton Hall, Jr. Director Director of the Companies (since July 30, 2000); Trustee
Comprehensive Health Services, Inc. of Excelsior Institutional Trust (since July 30, 2000);
8229 Boone Blvd., Suite 700 Chief Executive Officer, Comprehensive Health Services, Inc.
Vienna, VA 22182 (health care management and administration).
Age: 55
Jonathan Piel Director Director of the Companies (since 1996); Trustee
558 E. 87/th/ Street of Excelsior Institutional Trust and Excelsior
New York, NY 10128 Funds (since 1994); Vice President and Editor,
Age: 61 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: 74
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 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).
</TABLE>
______________________________
/2/ This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.
-30-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
---------------- ------------- -----------------------------------
<S> <C> <C>
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: 57
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: 41
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: 39
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: 33
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>
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<PAGE>
Each director receives an annual fee of $9,000 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000 from Excelsior
Institutional Trust plus a per-Company meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust 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 from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received $4,000 from Excelsior Funds plus a per-Company meeting
fee of $250 and each of these persons was reimbursed for expenses incurred in
attending meetings of Excelsior Funds. The Chairman of the Board of Excelsior
Funds received $5,000 per annum for services in such capacity. In addition,
Messrs. Drake, Piel and Robinson each receive $2,000 per annum for their
services on the Nominating Committee of Excelsior Funds, Inc. 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 July 7, 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 Companies Expenses Retirement to Directors
--------------- ------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Donald L. Campbell*** $18,000 None None $22,000 (3)**
Director
Rodman L. Drake $31,000 None None $38,750 (4)**
Director
Joseph H. Dugan $33,000 None None $38,250 (3)**
Director
Wolfe J. Frankl $30,000 None None $35,000 (3)**
Director
Jonathan Piel $34,000 None None $42,000 (4)**
Director
Robert A. Robinson $34,000 None None $39,500 (3)**
Director
Alfred C. Tannachion $33,000 None None $38,250 (3)**
Director
Frederick S. Wonham $43,000 None None $52,000 (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.
*** Donald L. Campbell resigned as a director of the Companies on July 31,
2000.
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 Prospectuses. The Adviser has also agreed to pay
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<PAGE>
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 $ 134,285 $ 98,059 $ 72,860
Intermediate-Term Managed $ 405,484 $ 317,118 $ 260,708
Income Fund
Managed Income Fund $1,340,412 $1,495,928 $1,203,851
Short-Term Tax-Exempt $ 105,368 $ 92,164 $ 99,010
Securities Fund
Intermediate-Term $ 859,668 $ 844,392 $ 746,025
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $ 657,856 $ 690,785 $ 545,298
</TABLE>
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:
-34-
<PAGE>
<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 $ 46,764 $ 40,855 $ 21,549
Intermediate-Term Managed $102,520 $ 74,201 $ 42,260
Income Fund
Managed Income Fund $ 59,713 $ 64,413 $243,873
Short-Term Tax-Exempt $ 31,657 $ 28,715 $ 24,358
Securities Fund
Intermediate-Term $213,990 $186,350 $133,635
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $107,456 $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.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
-35-
<PAGE>
CGFSC, Federated Services Company, 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. Until July 31, 2000, Federated Services Company's subsidiary,
Federated Administrative Services, served as the Companies' administrator. On
July 31, 2000, Federated Services Company assumed all of its subsidiary's rights
and obligations under the Administration Agreement. 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, a
subsidiary of Federated Services Company, 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:
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
-36-
<PAGE>
voluntarily waive all or a portion of the administration fee 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 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 $ 91,152 $ 70,684 $ 48,138
Intermediate-Term Managed $220,613 $170,673 $132,050
Income Fund
Managed Income Fund $327,936 $316,445 $294,955
Short-Term Tax-Exempt $ 69,463 $ 61,646 $ 62,813
Securities Fund
Intermediate-Term $465,818 $449,336 $383,863
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $219,829 $243,351 $189,687
</TABLE>
-37-
<PAGE>
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 $ 674 $ 162 $ 11
Intermediate-Term Managed $ 340 $ 389 $ 390
Income Fund
Managed Income Fund $ 184 $ 1,864 $ 381
Short-Term Tax-Exempt $ 76 $ 3 $ 104
Securities Fund
Intermediate-Term $ 1,376 $ 1,245 $ 674
Tax-Exempt Fund
Long-Term Tax-Exempt Fund $13,169 $14,210 $4,549
</TABLE>
-38-
<PAGE>
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.
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 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 $ 47,456 $ 45,558
Intermediate-Term Managed $102,860 $101,668
Income Fund
Managed Income Fund $383,171 $ 58,039
Short-Term Tax-Exempt $ 31,733 $ 31,544
Securities Fund
Intermediate-Term Tax-Exempt $215,366 $206,133
Fund
Long-Term Tax-Exempt Fund $120,625 $ 61,055
</TABLE>
For the fiscal year 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 year ended March 31, 1998, 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 $ 19,835 $ 19,800
Intermediate-Term Managed $ 42,650 $ 41,041
Income Fund
Managed Income Fund $ 51,215 $ 48,468
Short-Term Tax-Exempt $ 24,462 $ 24,157
Securities Fund
Intermediate-Term Tax-Exempt $134,309 $131,684
Fund
Long-Term Tax-Exempt Fund $ 94,008 $ 78,373
</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 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 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
-41-
<PAGE>
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 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
-42-
<PAGE>
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.
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.
-43-
<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 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 Managed Income Fund held a collateralized mortgage
obligation issued by Morgan Stanley Capital with a principal amount of
$5,000,000; a corporate bond issued by Lehman Brothers Holdings with a principal
amount of $3,000,000; and a corporate bond issued by Morgan Stanley Dean Witter
& Co. with a principal amount of $5,000,000. As of March 31, 2000, the
Intermediate-Term Managed Income Fund held a corporate bond issued by Morgan
Stanley Dean Witter & Co. with a principal amount of $4,000,000; a
collateralized mortgage obligation issued by Morgan Stanley Capital with a
principal amount of $2,964,162; and a collateralized mortgage obligation issued
by PaineWebber Mortgage Acceptance Corp. with a principal amount of $2,200,000.
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 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
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<PAGE>
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
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116 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, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP 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,
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, 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
-45-
<PAGE>
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 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
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<PAGE>
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.
b = expenses accrued for the period (net of
reimbursements).
c = average daily number of shares outstanding that were
entitled to receive dividends.
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<PAGE>
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
4.04%, 4.54%, 4.81%, 6.14%, 6.57% and 6.14%, 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 Tax-Exempt Funds for the 30-day period ended March 31, 2000
were 5.86%, 6.58% and 6.97%, 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
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<PAGE>
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 each 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:
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<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Returns
For the Year For the 5 Years For the 10 Years
Ended 3/31/00 Ended 3/31/00 Ended 3/31/00
----------------- ------------------- --------------------
<S> <C> <C> <C>
ST Tax-Exempt Fund* 1.39% 3.96% N/A
IT Tax Exempt Fund (0.58)% 5.27% 6.33%
LT Tax-Exempt Fund (4.01)% 5.54% 7.61%
ST Government Fund* 3.02% 5.39% N/A
IT Managed Income Fund* 0.59% 6.38% N/A
Managed Income Fund 0.72% 6.78% 7.84%
</TABLE>
* Commenced operations on December 31, 1992.
Based on the foregoing calculations, the aggregate annual total
returns for each Fund for the 5-year, 10-year and since inception periods ended
March 31, 2000, were as follows:
-50-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annual Total Returns
For the 5 Years For the 10 Years Since Inception
Ended 3/31/00 Ended 3/31/00 Period Ended 3/31/00
------------------- -------------------- ------------------------
<S> <C> <C> <C>
ST Tax-Exempt Fund* 21.46% N/A 30.99%
IT Tax-Exempt Fund 29.30% 84.77% 170.40%
LT Tax-Exempt Fund 30.92% 108.15% 246.85%
ST Government Fund * 30.10% N/A 40.92%
IT Managed Income Fund* 36.28% N/A 49.22%
Managed Income Fund 38.89% 112.90% 253.60%
</TABLE>
* Commenced operations on December 31, 1992.
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
-------
-51-
<PAGE>
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 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.
-52-
<PAGE>
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 July 7, 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 such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
As of July 7, 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 South SW Macadam Ave., Suite
450, Portland, Oregon 97201, 10.92%; Managed Income Fund: U.S. Trust Retirement
-------------------
Fund, c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York, 10036, 46.82%; 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, 5.18%; and Long-Term Tax-Exempt Fund: Charles Schwab &
-------------------------
Co., Inc., Special Custody A/C for, Attn: Mutual Funds, 101 Montgomery Street,
San Francisco, California 94104, 7.32%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Reports") Reports for the Funds are incorporated in this Statement
of Additional Information by reference. No other parts of the 2000 Annual
Reports are incorporated by reference herein. The financial statements included
in the 2000 Annual Reports for the Funds have been audited by the Companies'
independent auditors, Ernst & Young LLP, whose reports thereon also appear in
the 2000 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 2000 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.
-53-
<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
are also distinguished
A-1
<PAGE>
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.
A-2
<PAGE>
Fitch 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 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 minimal 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.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant 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.
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" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
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)
A-6
<PAGE>
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 ratings used by Fitch 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.
A-7
<PAGE>
"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
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
A-8
<PAGE>
-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.
"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.
A-9
<PAGE>
"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.
"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.
A-10
<PAGE>
"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 uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-11
<PAGE>
EXCELSIOR INSTITUTIONAL TRUST
Equity Fund
Value Equity Fund
Optimum Growth Fund
International Equity Fund
Income Fund
Total Return Bond Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
This Statement of Additional Information pertains to the Shares
("Retail Shares") and Institutional Shares (together with Retail Shares,
"Shares") of the Value Equity and Optimum Growth Funds, and the Institutional
Shares of the Equity, Income, Total Return Bond and International Equity Funds
(each, a "Fund" and collectively, the "Funds") of Excelsior Institutional Trust.
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectuses for the Funds dated August 1, 2000
(the "Prospectuses"). Copies of the Prospectuses may be obtained by writing
Excelsior Institutional Trust c/o Chase Global Funds Services Company, 73
Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012 (Retail
Shares) or (800) 881-9358 (Institutional Shares). Capitalized terms not
otherwise defined have the same meaning as in the Prospectuses.
The audited financial statements and related reports of Ernst & Young
LLP, independent auditors, contained in the annual reports to the Funds'
shareholders for the fiscal year ended March 31, 2000 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 (Retail Shares) or (800) 881-9358 (Institutional Shares).
<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............................................................ 1
Additional Information on Portfolio Instruments........................................... 4
Investment Limitations.................................................................... 27
PORTFOLIO TRANSACTIONS............................................................................. 30
PERFORMANCE INFORMATION............................................................................ 33
PORTFOLIO VALUATION AND DETERMINATION OF NET ASSET VALUE........................................... 38
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................... 40
Distributor............................................................................... 40
Purchase of Shares........................................................................ 40
Redemption Procedures..................................................................... 41
Other Redemption Information.............................................................. 42
INVESTOR PROGRAMS.................................................................................. 43
Systematic Withdrawal Plan................................................................ 43
Exchange Privilege........................................................................ 44
Retirement Plans.......................................................................... 44
Additional Information.................................................................... 45
RULE 12B-1 DISTRIBUTION PLAN....................................................................... 45
MANAGEMENT OF THE FUNDS............................................................................ 46
Trustees and Officers..................................................................... 46
Investment Advisory Services.............................................................. 53
Administrators............................................................................ 55
Shareholder Organizations................................................................. 57
Expenses.................................................................................. 58
Transfer Agent and Custodian.............................................................. 58
INDEPENDENT AUDITORS............................................................................... 59
COUNSEL............................................................................................ 59
TAXATION........................................................................................... 60
DESCRIPTION OF THE TRUST........................................................................... 62
</TABLE>
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TABLE OF CONTENTS
(continued)
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CODE OF ETHICS..................................................................................... 64
MISCELLANEOUS..................................................................................... 64
FINANCIAL STATEMENTS.............................................................................. 65
APPENDIX A........................................................................................ A-1
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CLASSIFICATION AND HISTORY
--------------------------
Excelsior Institutional Trust (the "Trust") is an open-end,
management investment company. Each Fund is a separate series of the Trust and
is classified as diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust was organized as a business trust under the
laws of the State of Delaware on April 27, 1994. Prior to March 15, 1999, the
Equity Fund, Value Equity Fund, Optimum Growth Fund, Income Fund, Total Return
Bond Fund and International Equity Fund were known as the Institutional Equity
Fund, Institutional Value Equity Fund, Institutional Optimum Growth Fund,
Institutional Income Fund, Institutional Total Return Bond Fund and
Institutional International Equity 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
Prospectuses. The investment objective of each Fund may be changed without
shareholder approval. Except as expressly noted below, each Fund's investment
policies also 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
------------------------------
Equity, Value Equity and Optimum Growth Funds
---------------------------------------------
Under normal market and economic conditions, the Equity, Value
Equity and Optimum Growth Funds will invest at least 65% of their respective
total assets in common stock, preferred stock and securities convertible into
common stock. Normally, not more than 35% of each Fund's total assets may be
invested in other securities and instruments including, e.g., investment-grade
debt securities, warrants, options, and futures instruments as described in more
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detail below. The Funds may hold cash or invest without limitation in U.S.
government securities, high quality money market instruments and repurchase
agreements collateralized by the foregoing obligations, if deemed appropriate by
the Adviser for temporary defensive purposes.
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 equity
securities of small companies have historically been characterized by greater
volatility of returns, greater total returns and lower dividend yields than
equity securities of large companies. 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 Equity, Value Equity and Optimum Growth Funds may invest
directly or indirectly in the securities of foreign issuers. The Funds currently
do not expect to invest more than 30% of their respective total assets at the
time of purchase in such securities.
Income and Total Return Bond Funds
----------------------------------
The Income and Total Return Bond 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, and 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 of which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Obligations"). The Adviser will consider investments in Municipal
Obligations for the Funds when the Adviser believes that the total return on
such securities is attractive relative to that of taxable securities.
Under normal market conditions, at least 65% of the Income and
Total Return Bond Funds' respective total assets will be invested in
investment-grade bonds that are rated within the three highest ratings of
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Services ("S&P") (or are unrated obligations considered to be of comparable
credit quality by the Adviser). "Investment-grade bonds" are bonds and other
debt instruments that are rated within the four highest ratings of Moody's or
S&P (or are unrated obligations considered to be of investment grade by the
Adviser) and U.S. government obligations and money market instruments of the
types described below. When, in the opinion of the Adviser, a defensive
investment posture is warranted, each of these Funds may invest temporarily and
without limitation in high quality, short-term money market instruments.
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<PAGE>
The Income Fund may invest up to 35% of its total assets, and the
Total Return Bond Fund may invest up to 5% of its total assets, in bonds rated
below investment grade. Investments in obligations rated below the four highest
ratings of S&P and Moody's ("junk bonds") have different risks than investments
in securities that are rated investment grade. Risk of loss upon default by the
borrower is significantly greater because lower-rated securities are generally
unsecured and are often subordinated to other creditors of the issuer, and
because the issuers frequently have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recessions, individual
corporate developments and increasing interest rates, than are investment grade
issuers. As a result, the market price of such securities, and the net asset
value of a Fund's shares, may be particularly volatile. Additional risks
associated with lower-rated fixed-income securities are (a) the relative youth
and growth of the market for such securities, (b) the sensitivity of such
securities to interest rate and economic changes, (c) the lower degree of
protection of principal and interest payments, (d) the relatively low trading
market liquidity for such securities, (e) the impact that legislation may have
on the high yield bond market (and, in turn, on a Fund's net asset value and
investment practices), (f) the operation of mandatory sinking fund or
call/redemption provisions during periods of declining interest rates whereby a
Fund may be required to reinvest premature redemption proceeds in lower yielding
portfolio securities, and (g) 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 debt obligation held by a 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, especially in a thinly traded
market. Finally, a Fund's trading in fixed-income securities to achieve capital
appreciation entails risks that capital losses rather than gains will result.
The Income and Total Return Bond Funds may invest up to 25% of
their respective total assets in (a) preferred stocks and (b) U.S.
dollar-denominated debt obligations of (i) foreign issuers, including foreign
corporations and foreign governments, and (ii) U.S. companies issued outside the
United States. 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.
International Equity Fund
-------------------------
Under normal market and economic conditions, the International
Equity Fund will invest at least 75% of its assets in foreign equity securities.
Foreign equity securities may include common stock, preferred stock, securities
convertible into common or preferred stock and warrants issued by companies
domiciled outside of the United States and shares of U.S. registered investment
companies that invest primarily in foreign securities. While there are no
prescribed limits on geographic distributions, the Fund normally will hold
securities of issuers
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<PAGE>
collectively having their principal place of business in no fewer than three
foreign countries. For cash management purposes, the Fund may invest up to 25%
of its assets on a continuous basis in cash or short-term instruments such as
commercial paper, bank obligations, U.S. government and agency securities
maturing within one year, notes and other investment-grade debt securities of
various maturities, and repurchase agreements collateralized by these
securities. Under unusual economic and market conditions, the Fund may restrict
the securities markets in which its assets are invested and may invest without
limitation in any combination of high quality domestic or foreign money market
instruments.
Convertible debt securities purchased by the Fund will be rated
investment grade by Moody's or S&P if such a rating is available. To be deemed
investment grade, debt securities must carry a rating of at least "Baa" from
Moody's or "BBB" from S&P. If unrated, as is the case with most foreign
securities, convertible debt securities purchased by the Fund will be deemed to
be comparable in quality to securities rated investment grade by the Adviser
under the supervision of the Board of Trustees of the Trust. With respect to
securities rated "Baa" by Moody's or "BBB" by S&P (the lowest of the top four
investment rankings), or deemed to be comparable in quality to such securities,
interest and principal payments are regarded as adequate for the present;
however, these securities may have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make interest and principal payments than is the case with higher
grade bonds. The Fund will sell in an orderly fashion as soon as possible any
debt securities it holds if they are downgraded below "Baa" by Moody's or "BBB"
by S&P. The Fund may purchase securities both on recognized stock exchanges and
in over-the-counter markets. Most of the Fund's portfolio transactions will be
effected in the primary trading market for the given security.
The countries in which the Fund may invest, include but are not
limited to: Japan, France, the United Kingdom, Germany, Italy, the Netherlands,
Switzerland, Singapore, Australia, Canada, Sweden, Ireland, Hong Kong, Thailand,
Spain, Portugal, Israel, Chile, Argentina and Hungary.
Additional Information on Portfolio Instruments
-----------------------------------------------
Gold Bullion
------------
The International Equity 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 Fund 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 Trust's Board of Trustees to best reflect its fair value. For
purpose of determining net asset value, gold held by the Fund will be valued in
U.S. dollars. Investments in gold will not produce dividends or
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<PAGE>
interest income, and the Fund can look only to price appreciation for a return
on such investments.
U.S. Government and Agency Securities
-------------------------------------
Securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities include U.S. Treasury securities, which differ
only in their interest rates, maturities and times of issuance. Treasury Bills
have initial maturities of one year or less; Treasury Notes have initial
maturities of one to ten years; and Treasury Bonds generally have initial
maturities of greater than ten years. Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, such as Government National
Mortgage Association pass-through certificates, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the Treasury;
others, such as those issued by the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and others are supported
only by the credit of the agency or instrumentality. While the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law.
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.
Variable Rate and Floating Rate Securities
------------------------------------------
Each Fund may purchase floating and variable rate demand notes
and bonds, which are obligations ordinarily having stated maturities in excess
of 397 days, but which permit
5
<PAGE>
the holder to demand payment of principal at any time, or at specified intervals
not exceeding 397 days, in each case upon not more than 30 days' notice.
Variable rate demand notes include master demand notes which are obligations
that permit a Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund, as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations.
The interest rate on a floating rate demand obligation is based
on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals.
Frequently, such obligations are collateralized by letters of credit or other
credit support arrangements provided by banks. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, a Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies
and a Fund may invest in obligations which are not so rated only if the Adviser
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. The Adviser will
consider on an ongoing basis the creditworthiness of the issuers of the floating
and variable rate demand obligations held by the Funds. Each Fund will not
invest more than 15% of the value of its net assets in floating or variable rate
demand obligations as to which it cannot exercise the demand feature on not more
than seven days' notice if there is no secondary market available for these
obligations, and in other securities that are deemed illiquid. See "Investment
Restrictions" below.
Participation Interests
-----------------------
Each Fund may purchase from financial institutions participation
interests in securities in which such Fund may invest. A participation interest
gives a Fund an undivided interest in the security in the proportion that the
Fund's participation interest bears to the total principal amount of the
security. These instruments may have fixed, floating or variable rates of
interest, with remaining maturities of 13 months or less. If the participation
interest is unrated, or has been given a rating below that which is permissible
for purchase by the Fund, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank, or the payment obligation
otherwise will be collateralized by U.S. government securities, or, in the case
of unrated participation interests, the Adviser must have determined that the
instrument is of comparable quality to those instruments in which the Fund may
invest. For certain participation interests, a Fund will have the right to
demand payment, on not more than seven days' notice, for all or any part of the
Fund's participation interest in the security, plus accrued interest. As to
these instruments, the Fund intends to exercise its right to demand payment only
upon a default under the terms of the security, as needed to provide liquidity
to meet redemptions, or to
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<PAGE>
maintain or improve the quality of its investment portfolio. Each Fund will not
invest more than 15% of its net assets in participation interests that do not
have this demand feature, and in other securities that are deemed illiquid.
Currently, no Fund intends to invest more than 5% of its net assets in
participation interests during the current year. See "Investment Restrictions"
below.
Illiquid Securities
-------------------
Each Fund may acquire investments that are illiquid or have
limited liquidity, such as private placements or investments that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"), and
cannot be offered for public sale in the United States without first being
registered under the 1933 Act. An illiquid investment is any investment that
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Fund. The price a Fund
pays for illiquid securities or receives upon resale may be lower than the price
paid or received for similar securities with a more liquid market.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them which,
if possible at all, would result in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the 1933 Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
Each Fund may not invest in additional illiquid securities if, as
a result, more than 15% of the market value of its net assets would be invested
in illiquid securities. Each Fund may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. Rule 144A
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act for resales of
certain securities to qualified institutional buyers.
7
<PAGE>
Rule 144A securities may be determined to be liquid in accordance
with guidelines established by the Adviser and approved by the Trustees of the
Trust. The Trustees will monitor the implementation of these guidelines on a
periodic basis. Because Rule 144A is relatively new, it is not possible to
predict how markets in Rule 144A securities will develop. If trading in Rule
144A securities were to decline, these securities could become illiquid after
being purchased, increasing the level of illiquidity of a Fund. As a result, a
Fund holding these securities might not be able to sell these securities when
the Adviser wishes to do so, or might have to sell them at less than fair value.
The Adviser will monitor the liquidity of Rule 144A securities
for each Fund under the supervision of the Trust's Board of Trustees. In
reaching liquidity decisions, the Adviser will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers wishing to purchase or sell
the security; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Unsecured Promissory Notes
--------------------------
Each Fund may also purchase unsecured promissory notes ("Notes")
which are not readily marketable and have not been registered under the 1933
Act, provided such investments are consistent with such Fund's investment
objectives and policies. Each Fund will invest no more than 15% of its net
assets in such Notes and in other securities that are not readily marketable
(which securities would include floating and variable rate demand obligations as
to which the Fund cannot exercise the demand feature described above and as to
which there is no secondary market). Currently, no Fund intends to invest any of
its assets in unsecured promissory notes during the coming year. See "Investment
Restrictions" below.
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 above 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
8
<PAGE>
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.
Borrowing and Reverse Repurchase Agreements
-------------------------------------------
Each Fund may borrow funds, in an amount up to one-third 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.
Municipal Obligations
---------------------
The Income and Total Return Bond Funds may, when deemed
appropriate by the Adviser in light of the Funds' investment objectives, 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 Income and Total Return Bond Funds that are
derived from interest on municipal securities would be taxable to the Funds'
shareholders for federal income tax purposes.
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 Income and Total Return Bond 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.
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The Income and Total Return Bond 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.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general market conditions, the financial condition of the
issuer, 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 Municipal
Obligations purchased by the 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.
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<PAGE>
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 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 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
Funds nor the Adviser will review the proceedings relating to the issuance of
Municipal Obligations or the bases for such opinions.
Stand-By Commitments
--------------------
The Income and Total Return Bond 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.
The Income and Total Return Bond Funds expect that stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, either 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 Income and Total Return Bond 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
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<PAGE>
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.
Foreign Securities
------------------
Investing in securities issued by companies whose principal
business activities are outside the United States may involve significant risks
not present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly those not
subject to the disclosure and reporting requirements of the U.S. securities
laws. Foreign issuers are generally not bound by uniform accounting, auditing
and financial reporting requirements comparable to those applicable to domestic
issuers. Investments in foreign securities also involve the risk of possible
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal of
funds or other assets of a Fund, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ from the
economy of the United States.
It is anticipated that in most cases the best available market
for foreign securities would be on exchanges or in over-the-counter markets
located outside the United States. Foreign stock markets, while growing in
volume and sophistication, are generally not as developed as those in the United
States, and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Fund's assets may be
released prior to receipt of payment, may expose a Fund to increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer. In
general, there is less overall governmental supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States.
The costs attributable to investing abroad are usually higher
than those attributable to investing in domestic securities for several reasons,
such as the higher cost of investment research, higher cost of custody of
foreign securities, higher commissions paid on comparable transactions in
foreign markets and additional costs arising from delays in settlements of
transactions involving foreign securities.
Each Fund may invest in foreign securities that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than foreign securities of the same class that
are not subject to such restrictions.
Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes. To the extent that such taxes are not
offset by credits or deductions allowed to investors under the federal income
tax laws, they may reduce the net return to investors.
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<PAGE>
Each of the Equity, Value Equity, Optimum Growth and
International Equity Funds 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.
The International Equity 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.
Forward Foreign Currency Exchange Contracts
-------------------------------------------
In accordance with their respective investment objectives and
policies, the Funds may buy and sell securities (and receive interest, dividends
and sale proceeds) in currencies other than the U.S. dollar. Therefore, the
Funds may from time to time enter into foreign currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Funds either enter into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or use forward contracts to purchase or sell
foreign currencies. The cost of a Fund's spot currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold.
A forward foreign currency exchange contract is an obligation
by a Fund to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement and is traded at
a net price without commission. A Fund maintains with its custodian a segregated
account of liquid assets in an amount at least equal to its obligations under
each forward foreign currency exchange contract. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the prices
of the Fund's securities or in foreign exchange rates, or prevent loss if the
prices of these securities should decline.
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Each Fund may enter into forward foreign currency exchange
contracts for hedging purposes in an attempt to protect against changes in
foreign currency exchange rates between the trade and settlement dates of
specific securities transactions or changes in foreign currency exchange rates
that would adversely affect a portfolio position or an anticipated investment
position. Since consideration of the prospect for currency parities will be
incorporated into the Adviser's long-term investment decisions, the Funds will
not routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the Adviser believes that it is important to
have the flexibility to enter into foreign currency hedging transactions when it
determines that the transactions would be in a Fund's best interest. Although
these transactions tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential
gain that might be realized should the value of the hedged currency increase.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
At or before the maturity of a forward foreign currency
exchange contract when a Fund has agreed to deliver a foreign currency, the 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 of 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.
While these contracts are not presently regulated by the
Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event, a Fund's ability to
utilize forward contracts may be restricted. Forward contracts may reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for a Fund than if it had not entered into
such contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Fund's foreign currency denominated portfolio securities
and the use of such techniques will subject the Fund to certain risks.
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<PAGE>
The matching of the increase in value of a forward contract
and the decline in the U.S. dollar equivalent value of the foreign
currency-denominated asset that is the subject of the hedge generally will not
be precise. In addition, a Fund may not always be able to enter into foreign
currency forward contracts at attractive prices and this will limit a Fund's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Fund's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Fund's cross-hedges and the movements in the exchange rates of the
foreign currencies in which the Fund's assets that are the subject of such
cross-hedges are denominated.
Guaranteed Investment Contracts
-------------------------------
Each Fund may invest in guaranteed investment contracts
("GICs") issued by insurance companies. Pursuant to such contracts, a Fund makes
cash contributions to a deposit fund of the insurance company's general account.
The insurance company then credits to the fund guaranteed interest. The GICs
provide that this guaranteed interest will not be less than a certain minimum
rate. The insurance company may assess periodic charges against a GIC for
expenses and service costs allocable to it, and the charges will be deducted
from the value of the deposit fund. Because a Fund may not receive the principal
amount of a GIC from the insurance company on seven days' notice or less, the
GIC is considered an illiquid investment and, together with other instruments in
a Fund which are deemed illiquid, will not exceed 15% of the Fund's net assets.
The term of a GIC will be 13 months or less. In determining average weighted
portfolio maturity, a GIC will be deemed to have a maturity equal to the longer
of the period of time remaining until the next readjustment of the guaranteed
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand. Currently, each Fund intends to invest
5% or less of its respective net assets in GICs during the current year.
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
15
<PAGE>
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.
Zero Coupon Obligations
-----------------------
A Fund may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since interest income is accrued throughout the term of the zero
coupon obligation but is not actually received until maturity, a Fund, which is
required for tax purposes to distribute to its shareholders a certain percentage
of its income, may have to sell other securities to distribute the income prior
to maturity of the zero coupon obligation.
Asset-Backed Securities
-----------------------
If permitted pursuant to its investment objectives and
policies, a Fund may invest in asset-backed securities including, but not
limited to, interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables, equipment leases, manufactured
housing (mobile home) leases, or home equity loans. These securities may be in
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<PAGE>
the form of pass-through instruments or asset-backed bonds. The securities are
issued by non-governmental entities and carry no direct or indirect government
guarantee.
The credit characteristics of asset-backed securities differ
in a number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the credit
quality of the assets underlying such securities, how well the entity issuing
the securities is insulated from the credit risk of the originator or any other
affiliated entities, and the amount and quality of any credit enhancement to
such securities.
Credit card receivables are generally unsecured and debtors
are entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by motor vehicle installment purchase obligations
permit the servicer of such receivable to retain possession of the underlying
obligations. If the servicer sells these obligations to another party, there is
a risk that the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and obligor
moves to another state, such re-registration could defeat the original security
interest in the vehicle in certain cases. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Mortgage Pass-Throughs and Collateralized Mortgage Obligations
--------------------------------------------------------------
The Income and Total Return Bond Funds may purchase mortgage
and mortgage-related securities such as pass-throughs and collateralized
mortgage obligations that meet each Fund's selection criteria and are investment
grade or of comparable quality (collectively, "Mortgage Securities"). Mortgage
pass-throughs are securities that pass through to investors an undivided
interest in a pool of underlying mortgages. These are issued or guaranteed by
U.S. government agencies such as the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). Other mortgage pass-throughs consist of
whole loans originated and issued by private limited purpose corporations or
conduits. Collateralized mortgage obligation bonds are obligations of special
purpose corporations that are collateralized or supported by mortgages or
mortgage securities such as pass-throughs.
Mortgage Securities may be subject to a greater degree of
market volatility as a result of unanticipated prepayments of principal. During
periods of declining interest rates, the principal invested in mortgage-backed
securities with high interest rates may be repaid earlier than scheduled, and
the Funds will be forced to reinvest the unanticipated payments at generally
lower interest rates. When interest rates fall and principal prepayments are
reinvested at lower interest rates, the income that the Funds derive from
mortgage-backed securities is reduced. In
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<PAGE>
addition, like other fixed income securities, Mortgage Securities generally
decline in price when interest rates rise.
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 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
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<PAGE>
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 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,
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<PAGE>
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.
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.
Options
-------
Each Fund 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
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<PAGE>
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.
21
<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.
Short Sales "Against the Box"
-----------------------------
In a short sale, a Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. A Fund
may engage in short sales only if at the time of the short sale it owns or has
the right to obtain, at no additional cost, an equal amount of the security
being sold short. This investment technique is known as a short sale "against
the box."
In a short sale, the seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. If a Fund engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Fund maintains in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Fund's long position.
A Fund will not engage in short sales against the box for investment
purposes. A Fund may, however, make a short sale as a hedge, when it believes
that the price of a security may decline, causing a decline in the value of a
security (or a security convertible or exchangeable for such security), or when
a Fund wants to sell the security at an attractive current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes or
for purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code of 1986, as amended (the "Code"). In
such case, any future losses in a Fund's long position should be reduced by a
gain in the short position. Conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced depends upon the amount of the security sold short relative
to the amount a Fund owns. There are certain additional transaction costs
associated with short sales
22
<PAGE>
against the box, but a Fund will endeavor to offset these costs with the income
from the investment of the cash proceeds of short sales.
As a non-fundamental operating policy, not more than 40% of a Fund's
total assets would be involved in short sales against the box.
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.
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.
Short-Term Instruments
----------------------
23
<PAGE>
Each Fund may invest in short-term income securities in accordance
with its investment objective and policies. The Funds may also make money market
investments pending other investments or settlement, or to maintain liquidity to
satisfy redemption requests. In adverse market conditions and for temporary
defensive purposes only, each Fund may temporarily invest its assets without
limitation in short-term investments. Short-term investments include:
obligations of the U.S. government and its agencies or instrumentalities;
commercial paper, variable amount master demand notes and other debt securities,
including high quality U.S. dollar-denominated short-term bonds and notes issued
by domestic and foreign corporations; variable and floating rate securities;
bank obligations; repurchase agreements collateralized by these securities; and
shares of other investment companies that primarily invest in any of the above-
referenced securities.
The Funds may invest in commercial paper issued by major corporations
in reliance on the exemption from registration afforded by Section 3(a)(3) of
the 1933 Act. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts. Each Fund may purchase three types of
commercial paper, as classified by exemption from registration under the 1933
Act. The three types include open market, privately placed and letter of credit
commercial paper. Trading of such commercial paper is conducted primarily by
institutional investors through investment dealers or directly through the
issuers. Individual investor participation in the commercial paper market is
very limited. "Open market" commercial paper refers to the commercial paper of
any industrial, commercial, or financial institution which is openly traded,
including directly issued paper. "Open market" paper's 1933 Act exemption is
under Section 3(a)(3) which limits the use of proceeds to current transactions,
limits maturities to 270 days and requires that the paper contain no provision
for automatic rollovers. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2) of the 1933 Act, which
exempts transactions by an issuer not involving any public offering. The
commercial paper may only be offered to a limited number of accredited
investors. "Privately placed" commercial paper has no maturity restriction and
may be considered illiquid. See "Illiquid Securities" below. "Letter of credit"
commercial paper is exempt from registration under Section 3(a)(2) of the 1933
Act. It is backed by an irrevocable or unconditional commitment by a bank to
provide funds for repayment of the notes. Unlike "open market" and "privately
placed" commercial paper, "letter of credit" paper has no limitations on
purchases.
Each Fund may invest in U.S. dollar-denominated certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations
issued by domestic banks and domestic or foreign branches or subsidiaries of
foreign banks. Certificates of deposit are certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Such instruments include Yankee Certificates of Deposit ("Yankee CDs"),
which are certificates of deposit denominated in U.S. dollars and issued in the
United States by the domestic branch of a foreign bank. Time deposits are non-
negotiable deposits maintained in a
24
<PAGE>
banking institution for a specified period of time at a stated interest rate.
Time deposits which may be held by the Funds are not insured by the Federal
Deposit Insurance Corporation or any other agency of the U.S. government. A Fund
will not invest more than 15% of the value of its net assets in time deposits
maturing in longer than seven days and other instruments which are deemed
illiquid or not readily marketable. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument upon maturity.
Domestic commercial banks organized under federal law are supervised
and examined by the Comptroller of the Currency and are required to be members
of the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("Cds") and time deposits ("Tds"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
Foreign branches and subsidiaries are not necessarily subject to the same or
similar regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and financial
record keeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the appropriate
regulatory authority; and (2) maintain assets within the state in an
25
<PAGE>
amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state.
The Funds will limit their short-term investments to those U.S.
dollar-denominated instruments which are determined by or on behalf of the Board
of Trustees of the Trust to present minimal credit risks and which are of "high
quality" as determined by an NRSRO (e.g., rated P-1 by Moody's or A-1 by S&P)
or, in the case of instruments which are not rated, are deemed to be of
comparable quality by the Adviser under the supervision of the Board of Trustees
of the Trust. The Funds may invest in obligations of banks which at the date of
investment have capital, surplus and undivided profits (as of the date of their
most recently published financial statements) in excess of $100 million.
Investments in high quality short-term instruments may, in many circumstances,
result in a lower yield than would be available from investments in instruments
with a lower quality or longer term.
Derivative Contracts and Securities
-----------------------------------
The term "derivative" has traditionally been applied to certain
contracts (including futures, forward, option and swap contracts) that derive
their value from changes in the value of an underlying security, currency,
commodity or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities derived from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase
the volatility of a Fund's total performance. To the extent that a Fund invests
in securities that could be characterized as derivatives, such as mortgage pass-
throughs and collateralized mortgage obligations, it will only do so in a manner
consistent with its investment objective, policies and limitations.
Certain Other Obligations
-------------------------
In order to allow for investments in new instruments that may be
created in the future, a Fund may invest in obligations other than those listed
herein, provided such investments are consistent with such Fund's investment
objective, policies and restrictions.
Portfolio Turnover Rate
-----------------------
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
26
<PAGE>
distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxation" below.
The portfolio turnover of the International Equity Fund decreased from
107% in 1999 to 43% in 2000. The portfolio turnover was higher in 1999 because
the Fund changed its investment adviser in 1999, and the new adviser
restructured the Fund's portfolio during that year.
The Total Return Bond Fund's portfolio turnover decreased from 234% in
1999 to 115% in 2000 because fewer investment opportunities were available in
2000 than in 1999.
Rating Services
---------------
Ratings represent the opinions of rating services as to the quality of
the securities that they undertake to rate. It should be emphasized, however,
that ratings are relative and subjective and are not absolute standards of
quality. Although these ratings are an initial criterion for selection of
portfolio investments, the Adviser also makes its own evaluations of these
securities, subject to review by the Board of Trustees of the Trust. After
purchase by a Fund, an obligation may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event would
require a Fund to dispose of the obligation, but the Adviser will consider such
an event in its determination of whether the Fund should continue to hold the
obligation. A description of the ratings used herein is set forth in the
Appendix to this Statement of Additional Information.
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 Trust 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 Trust or such Fund, or (b) 67% or more of the shares of the Trust
or such Fund present at a meeting if more than 50% of the outstanding shares of
the Trust 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 Trust's Board of Trustees without shareholder approval.
As a matter of fundamental policy, each Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's assets
(including such borrowing) less liabilities (not including such borrowing), it
may borrow money, enter into reverse repurchase agreements, and purchase when-
issued securities, and except that it may pledge,
27
<PAGE>
mortgage or hypothecate its assets to secure such borrowings, reverse repurchase
agreements, or when-issued securities, provided that collateral arrangements
with respect to options and futures, including deposits of initial margin and
variation margin, are not considered a pledge of assets for purposes of this
restriction, and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance company sponsored
by the Investment Company Institute. The Equity, Income, Total Return Bond and
International Equity Funds will not purchase securities while borrowings exceed
5% of their respective total assets;
(2) underwrite securities issued by other persons except insofar as the
Trust or a Fund may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3) make loans to other persons except (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value), (b) through the use of
repurchase agreements or the purchase of short-term obligations, or (c) by
purchasing debt securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests
in partnerships substantially all of whose assets consist of real estate but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (the Trust may hold and
sell, for a Fund's portfolio, real estate acquired as a result of the Fund's
ownership of securities);
(5) invest 25% or more of its assets in any one industry (excluding U.S.
government securities); or
(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
With respect to the Equity, Income, Total Return Bond and
International Equity Funds, none of the above-referenced fundamental investment
restrictions shall prevent a Fund from investing all of its investable assets in
an open-end management investment company with substantially the same investment
objective and policies as the Fund.
Each Fund will not as a matter of operating policy:
(7) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(8) invest for the purpose of exercising control or management;
28
<PAGE>
(9) purchase securities issued by any other investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of any investment
company will not be purchased for the Fund if such purchase at the time thereof
would cause (a) more than 10% of the Fund's total assets (taken at the greater
of cost or market value) to be invested in the securities of such issuers; (b)
more than 5% of the Fund's total assets (taken at the greater of cost or market
value) to be invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the Fund;
(10) purchase securities of any issuer if such purchase at the time thereof
would cause the Fund to hold more than 10% of any class of securities of such
issuer, for which purposes all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be deemed a single
class, except that futures or option contracts shall not be subject to this
restriction;
(11) purchase or retain in the Fund's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the Trust, or is an officer or partner of
the investment adviser of the Fund, if after the purchase of the securities of
such issuer for the Fund one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, all taken at market value, of
such issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or securities,
or both, all taken at market value;
(12) invest more than 5% of the Fund's net assets in warrants (valued at
the lower of cost or market);
(13) make short sales of securities or maintain a short position (excluding
short sales if the Fund owns an equal amount of such securities or securities
convertible into or exchangeable for, without payment of any further
consideration, securities of equivalent kind and amount) if such short sales
represent more than 25% of the Fund's net assets (taken at market value);
provided, however, that the value of the Fund's short sales of securities
(excluding U.S. government securities) of any one issuer may not be greater than
2% of the value (taken at market value) of the Fund's net assets or more than 2%
of the securities of any class of any issuer; or
(14) enter into repurchase agreements providing for settlement in more than
seven days after notice, or purchase securities which are not readily
marketable, if, in the aggregate, more than 15% of its net assets would be so
invested.
Policies (7) through (14) may be changed by the Board of Trustees of
the Trust without shareholder approval.
29
<PAGE>
As diversified portfolios, 75% of the assets of each Fund are
represented by cash and cash items (including receivables), government
securities, securities of other investment companies, and other securities which
for purposes of this calculation are subject to the following fundamental
limitations: (a) the Fund may not invest more than 5% of its total assets in the
securities of any one issuer, and (b) the Fund may not own more than 10% of the
outstanding voting securities of any one issuer. In addition, each Fund may not
invest 25% or more of its assets in the securities of issuers in any one
industry. These are fundamental investment policies of each Fund which may not
be changed without shareholder approval. For purposes of these policies and
limitations, each Fund considers certificates of deposit and demand and time
deposits issued by a U.S. branch of a domestic bank or savings association
having capital, surplus and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."
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.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Trust's Board of Trustees, 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.
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Code, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in the recognition of a profit or loss. Each Fund
may engage in short-term trading to achieve its investment objective(s).
Portfolio turnover may vary greatly from year to year as well as within a
particular year. It is expected that the Income Fund's and Total Return Bond
Fund's turnover rates may remain higher than those of many other investment
companies with similar investment objectives and policies; however, since
brokerage commissions are not normally paid on instruments purchased by these
Funds, portfolio turnover is not expected to have a material effect on the net
asset value of either Fund. Each Fund's portfolio turnover rate may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable a Fund to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
Portfolio trading is engaged in for a Fund if the Adviser believes that a
transaction net of costs (including custodian charges) will help achieve the
Fund's investment objective.
A Fund's purchase and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Funds do not
anticipate paying brokerage commissions in such transactions.
30
<PAGE>
Purchases and sales of the Income Fund's and Total Return Bond Fund's portfolio
securities will usually be principal transactions without brokerage commissions.
Any transactions for which a Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and the asked price.
Allocations of transactions, including their frequency, to
various dealers is determined by the Adviser in its best judgment and in a
manner deemed to be in the best interest of the investors in the applicable Fund
rather than by any formula. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. 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.
The Advisory Agreements 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 the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis.
In addition, the Advisory Agreements authorize the Adviser, to
the extent permitted by law and subject to the review of the Trust's Board of
Trustees, 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. Such services might also include reports on global, regional, and
country-by-country prospects for 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 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:
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<PAGE>
Fund Amount of Transactions Related Commission
---- ---------------------- ------------------
Equity Fund $ 87,633 $ 4,067
Optimum Growth Fund $ 48,906 $ 4,083
International Equity Fund $294,694 $12,995
Investment decisions for a Fund will be made independently
from those for any other account or investment company that is or may in the
future become managed by the Adviser or any of its affiliates. If, however, a
Fund and other investment companies or accounts managed by the Adviser are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Fund or the size of the position obtainable for the Fund. In
addition, when purchases or sales of the same security for a Fund and for other
investment companies managed by the Adviser occur contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales. Furthermore, in
certain circumstances affiliates of the Adviser whose investment portfolios are
managed internally, rather than by the Adviser, might seek to purchase or sell
the same type of investments at the same time as a Fund. Such an event might
also adversely affect that Fund.
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 % of Transaction on
Total Commissions 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
--------------------------------
Equity Fund $ 87,633 $ 0 0 0
Value Equity Fund $ 67,587 $ 0 0 0
Optimum Growth Fund $ 48,906 $ 0 0 0
International Equity Fund $294,694 $ 0 0 0
Income Fund $ 0 $ 0 0 0
Total Return Bond Fund $ 0 $ 0 0 0
Fiscal year ended March 31, 1999:
--------------------------------
Equity Fund $114,325 $ 0 0 0
Value Equity Fund $ 48,291 $ 0 0 0
Optimum Growth Fund $ 20,032 $ 0 0 0
International Equity Fund $248,086 $ 0 0 0
Fiscal year ended March 31, 1998
--------------------------------
Equity Fund $118,960 $9,474 7.96% 8.44%
Value Equity Fund $ 43,969 $1,377 3.13% 3.93%
Optimum Growth Fund $ 15,289 $ 0 0 0
International Equity Fund $108,548 $ 0 0 0
</TABLE>
32
<PAGE>
/1/ UST Securities Corp. is an affiliate of the Adviser.
The Trust 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
Trust's regular brokers or dealers or their parents: the Income Fund held an
asset-backed security issued by Merrill Lynch Mortgage Investors, Inc. with a
principal amount of $2,053,056; and the Total Return Bond Fund held a corporate
bond issued by Goldman Sachs Group, Inc. with a principal amount of $4,060,000;
and a corporate bond issued by Bank of America with a principal amount of
$10,380,000.
PERFORMANCE INFORMATION
-----------------------
Standard Performance Information
--------------------------------
From time to time, performance quotations of the Funds'
Institutional Shares or Retail Shares may be included in advertisements, sales
literature or shareholder reports. These performance figures are calculated in
the following manner:
Yield. The Trust may provide annualized "yield" quotations for
Institutional Shares of the Income and Total Return Bond Funds. The "yield" of a
Fund refers to the income generated by an investment in such Fund over a thirty
day or one month period. The dates of any such period are identified in all
advertisements or communications containing yield quotations. Income is then
annualized; that is, the amount of income generated by an investment in
Institutional Shares of a Fund over a period is assumed to be generated (or
remain constant) over one year and is shown as a percentage of the net asset
value on the last day of that year-long period. The Funds may also advertise the
"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. The Income and
Total Return Bond Funds may quote the standardized effective 30-day (or one
month) yield for their respective Institutional Shares, calculated in accordance
with the method prescribed by the SEC for mutual funds. Such yield will be
calculated for each Fund's Institutional Shares according to the following
formula:
33
<PAGE>
Yield = 2 (ab/cd + 1)/6/
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), each Fund 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 Fund
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 a Fund to all shareholder accounts 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).
For the 30-day period ended March 31, 2000, the standardized
effective yield for Institutional Shares of the Income and Total Return Bond
Funds was as follows: Income Fund, 6.56%; and Total Return Bond Fund, 6.50%.
Total Return. The Trust may provide period and annualized
"total rates of return" and non-standardized total return data for Institutional
Shares or Retail Shares of a Fund. The "total rate of return" refers to the
change in the value of an investment in Institutional Shares or Retail Shares of
a Fund over a stated period which reflects any change in net asset value per
share and includes the value of any such Shares purchased with any dividends or
capital gains declared during such period. Period total rates of return may be
annualized. An annualized total rate of return is a compounded total rate of
return which assumes that the period total rate of
34
<PAGE>
return is generated over a one-year period, and that all dividends and capital
gains distributions are reinvested in Shares of the same class. The "average
annual total return" for Institutional Shares and Retail Shares of a Fund may be
quoted, and such 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/P)/1/n/ - 1]
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.
A Fund may also advertise the "aggregate total return" for its
Institutional Shares and Retail 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:
Aggregate Total Return = [(ERV/P)] - /1/
The above calculations are made assuming that (1) all
dividends and capital gains 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:
<TABLE>
<CAPTION>
Commencement of
One Year Period Five Year Period Operations* until
Ended March 31, 2000 Ended March 31, 2000 March 31, 2000
-------------------- -------------------- -----------------
<S> <C> <C> <C>
Equity Fund
Institutional Shares 25.75% 25.52% 25.59%
Value Equity Fund
Institutional Shares 41.92% N/A 27.92%
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C>
Retail Shares 41.60% N/A 27.65%
Optimum Growth Fund
Institutional Shares 27.66% N/A 39.09%
Retail Shares 27.40% N/A 38.67%
International Equity Fund
Institutional Shares 64.29% 16.89% 17.10%
Income Fund
Institutional Shares 1.16% 6.33% 6.68%
Total Return Bond Fund
Institutional Shares 1.47% 7.03% 7.40%
</TABLE>
* Institutional Shares of the Equity and Income Funds commenced
operations on January 16, 1995; Institutional Shares of the Total
Return Bond Fund commenced operations on January 19, 1995;
Institutional Shares of the Optimum Growth Fund commenced operations on
June 1, 1996; Retail Shares of the Optimum Growth Fund commenced
operations on July 3, 1996; Institutional Shares of the Value Equity
Fund commenced operations on June 1, 1996; Retail Shares of the Value
Equity Fund commenced operations on January 15, 1997; and Institutional
Shares of the International Equity Fund commenced operations on January
24, 1995.
Based on the foregoing calculations, the aggregate annual
total returns for the Funds were as follows:
36
<PAGE>
<TABLE>
<CAPTION>
Five-Year Period Ended Commencement of
3/31/00* Operations* until 3/31/00
---------------------- -------------------------
<S> <C> <C>
Equity Fund
Institutional Shares 211.52% 227.31%
Value Equity Fund
Institutional Shares N/A 156.95%
Retail Shares N/A N/A
Optimum Growth Fund
Institutional Shares N/A 156.95%
Retail Shares N/A N/A
International Equity Fund
Institutional Shares 118.24% 126.66%
Income Fund
Institutional Shares 35.95% 40.04%
Total Return Bond Fund
Institutional Shares 40.45% 44.94%
</TABLE>
* Institutional Shares of the Equity and Income Funds commenced
operations on January 16, 1995; Institutional Shares of the Total
Return Bond Fund commenced operations on January 19, 1995;
Institutional Shares of the Optimum Growth Fund commenced operations on
June 1, 1996; Retail Shares of the Optimum Growth Fund commenced
operations on July 3, 1996; Institutional Shares of the Value Equity
Fund commenced operations on June 1, 1996; Retail Shares of the Value
Equity Fund commenced operations on January 15, 1997; and Institutional
Shares of the International Equity Fund commenced operations on January
24, 1995.
Performance Results. Any yield or total return quotation
provided for Institutional Shares and Retail Shares of a Fund should not be
considered as representative of the performance of that Fund in the future since
the net asset value of shares of that Fund will vary based not only on the type,
quality and maturities of the securities held by it, but also on changes in the
current value of such securities and on changes in the expenses of the Fund.
These factors and possible differences in the methods used to calculate yields
and total return should be considered when comparing the yield and total return
of Institutional Shares and Retail Shares of a Fund to yields and total rates of
return published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income. Retail
Shares in a Fund have different expenses than Institutional Shares which may
affect performance. Any fees charged by shareholder organizations to customers
that have invested in Shares and any charges to institutional investors for
asset management and related services will not be included in calculations of
performance.
Distribution Rate. Each Fund may also quote its distribution
rate. Distribution rate is calculated by annualizing the per share distribution
for the most recent calendar month
37
<PAGE>
and dividing such annualized distribution by the net asset value per share on
the last day of such month. The distribution rate of a fund will not be used in
advertising unless accompanied by standard performance measures.
Comparison of Fund Performance
------------------------------
Comparisons of non-standardized performance measures of
various investments are valid only if performance is calculated in the same
manner for each measure in the comparison. Since there are different methods of
calculating performance, investors should consider the effect of the methods
used to calculate performance when comparing the performance of Institutional
Shares and Retail Shares of a Fund with performance quoted with respect to other
investment companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, each Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs. Some Funds may
invest in some instruments not eligible for inclusion in such an index, and may
be prohibited from investing in some instruments included in this index.
Rankings and other evaluations of a Fund's performance made by independent
sources may also be used in advertisements concerning such Fund. Sources for a
Fund's performance information may include, but are not limited to, the
following: Barron's, Business Week, Consumer Digest, Donoghue's Money Fund
Report, Financial Times, Forbes, Fortune, New York Times and Wall Street
Journal.
PORTFOLIO VALUATION AND DETERMINATION OF NET ASSET VALUE
--------------------------------------------------------
The Trust determines the net asset value of the Institutional
Shares and Retail Shares of a Fund each day both the New York Stock Exchange
(the "NYSE") and the Adviser are open for business (a "Business Day"). As a
result, each Fund will normally determine its net asset value every weekday
except for the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas.
Daily determinations of net asset value for each Fund are made
at the close of regular trading hours on the NYSE, currently 4:00 p.m. (Eastern
time), and are calculated separately for each class of Shares by dividing the
total assets of a Fund that are allocated to a particular class of Shares less
all of its liabilities charged to that class, by the total number of Shares of
the class that are outstanding at the time the determination is made. As
discussed below, purchases, exchanges and redemptions will be effected at the
net asset value per share next computed after a request is received in good
order.
Assets in the Funds which are traded on a recognized domestic
stock exchange or are quoted on a national securities market are valued at the
last sale price on the securities
38
<PAGE>
exchange on which such securities are primarily traded or at the last sale price
on such national securities market. Securities in the Funds which are traded
only on over-the-counter markets are valued on the basis of closing over-the-
counter bid prices, and securities in such Funds for which there were no
transactions are valued at the average of the most recent 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 Board of Trustees of the Trust. Absent unusual circumstances,
debt securities maturing in 60 days or less are valued at amortized cost.
Securities of the 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 after
consideration of such events and other material factors, all under the direction
and guidance of the Board of Trustees of the Trust. 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. Absent unusual
circumstances, 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 policies
established by the Board of Trustees of the Trust. 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 held by the Funds, and may use one or
more independent pricing services in connection with this service. The methods
used by the pricing services and the valuations so established will be reviewed
by the Adviser and the administrators under the general supervision of the Board
of Trustees of the Trust.
A determination of value used in calculating net asset value
must be a fair value determination made in good faith utilizing procedures
approved by the Trust's Board of Trustees. While no single standard for
determining fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which a Fund could expect to receive upon
its current sale. Some, but not necessarily all, of the general factors which
may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial statements of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same class at the time of purchase, special reports prepared by analysts,
information as to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
39
<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 Trust'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 devote its best efforts to effect the
sale of Shares, but is not obligated to sell any certain number of Shares.
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 Trust's 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
40
<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.
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 banks,
and other Shareholder Organizations that have entered into agreements with the
Trust.
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' 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 Trust, 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. In addition, certain redemptions of
Shares of the International Equity Fund are subject to a 2.00% redemption fee.
See the Funds' 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).
41
<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. 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 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 Trust 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 NYSE is restricted by applicable rules and regulations of the SEC; (b) the
NYSE is closed for other than customary
42
<PAGE>
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 Trust 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 Trust 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.
Under certain circumstances, the Trust 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 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
(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
43
<PAGE>
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 Retail Shares of any other
portfolio of the Trust or for Shares of any portfolio of Excelsior Funds, Inc.
or Excelsior Tax-Exempt Funds, Inc. Institutional Shares may be exchanged for
Institutional Shares of any portfolio of Excelsior Institutional Trust or
Excelsior Funds, Inc. 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
Trust. However, certain exchanges are subject to a 2% redemption fee. See
"Redemption Procedures." In order to prevent abuse of this privilege to the
disadvantage of other shareholders, the Trust reserves 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.
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.
44
<PAGE>
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.
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.
RULE 12B-1 DISTRIBUTION PLAN
----------------------------
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted a
Distribution Plan (the "Distribution Plan") which permits the Retail Shares of
the Value Equity and Optimum Growth Funds to bear certain expenses in connection
with the distribution of such Shares. As required by Rule 12b-1, the Funds'
Distribution Plan and related distribution agreement have been approved, and are
subject to annual approval by, a majority of the Trust's Board of Trustees, and
by a majority of the trustees who are not interested persons of the Trust and
have no direct or indirect interest in the operation of the Distribution Plan or
any agreement relating to the Distribution Plan, by vote cast in person at a
meeting called for the purpose of voting on the Distribution Plan and related
agreement. Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a Fund (in the Funds' case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.
Under the Distribution Plan, the Retail Shares of the Value Equity and
Optimum Growth Funds may compensate the Distributor monthly for its services
which are intended to result in the sale of Retail Shares. The compensation may
not exceed the annual rate of 0.25% of the average daily net asset value of each
Fund's outstanding Retail Shares. The Distributor may also use the distribution
fees to defray direct and indirect marketing expenses such as: (i) the expense
of preparing, printing and distributing promotional materials and prospectuses
(other than prospectuses used for regulatory purposes or for distribution to
existing shareholders); (ii) the expense of other advertising via radio,
television or other print or electronic media; and (iii) the expense of payments
to financial institutions ("Distribution Organizations") for distribution
assistance (including sales incentives). Payments under the Distribution Plan
are not tied directly to out-of-pocket expenses and therefore may be used by the
Distributor as it chooses (for example, to defray its overhead expenses).
45
<PAGE>
Any material amendment to the Trust's arrangements with Distribution
Organizations must be approved by a majority of the Trust's Board of Trustees
(including a majority of the disinterested trustees). Any change in the
Distribution Plan that would materially increase the distribution expenses of
Retail Shares requires approval by holders of those Shares, but otherwise, the
Distribution Plan may be amended by the trustees, including a majority of the
disinterested trustees. So long as the Distribution Plan is in effect, the
selection and nomination of the members of the Trust's Board of Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust will be
committed to the discretion of such non-interested trustees.
The Distribution Plan will continue in effect for successive one year
periods, provided that such continuance is specifically approved by the vote of
a majority of the trustees who are not parties to the Distribution Plan or
interested persons of any such party and who have no direct or indirect
financial interest in the Distribution Plan or any related agreement and the
vote of a majority of the entire Board of Trustees. The Distribution Plan and
related agreement may be terminated as to a particular Fund by a vote of a
majority of the Trust's disinterested trustees or by vote of the holders of a
majority of the Retail Shares of the Fund.
For the fiscal year ended March 31, 2000, the Retail Shares of the
Value Equity and Optimum Growth Funds bore distribution fees under the
Distribution Plan of $343 and $45,308, respectively, to compensate the
Distributor for distribution-related services.
MANAGEMENT OF THE FUNDS
-----------------------
Trustees and Officers
---------------------
The business and affairs of the Funds are managed under the direction
of the Trust's Board of Trustees. The trustees and executive officers of the
Trust, their addresses, ages, principal occupations during the past five years,
and other affiliations are as follows:
46
<PAGE>
<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other Affiliations
Name and Address Trust During Past 5 Years
---------------- ----- -------------------
<S> <C> <C>
Frederick S. Wonham* Chairman of the Board, Retired; Chairman of the Boards (since 1997), and President,
238 June Road President and Treasurer Treasurer and Director (since 1995) of Excelsior Funds, Inc. and
Stamford, CT 06903 Excelsior Tax-Exempt Funds, Inc.; Chairman of the Boards (since
Age: 69 1997), President, Treasurer and Trustee (since 1995) of Excelsior
Funds and Excelsior Institutional Trust; 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).
Alfred C. Tannachion* Trustee Retired; Director of Excelsior Funds, Inc. and Excelsior Tax-
6549 Pine Meadows Drive Exempt Funds, Inc. (since 1985); Chairman of the Board of
Spring Hill, FL 34606 Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Age 74 (1991-1997) and the Trust (1996-1997); President and Treasurer of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. (1994-
1997) and the Trust (1996-1997); Chairman of the Board, President
and Treasurer of UST Master Variable Series, Inc. (1994-1997);
and Trustee of the Trust (since 1995).
</TABLE>
_____________________
* This trustee is considered to be an "interested person" of the Trust as
defined in the 1940 Act.
47
<PAGE>
<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other Affiliations
Name and Address Trust During Past 5 Years
---------------- ----- -------------------
<S> <C> <C>
Rodman L. Drake Trustee Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Continuation Investments (since 1996); Trustee of Excelsior Institutional Trust and Excelsior
Group, Inc. Funds (since 1994); Director, Parsons Brinkerhoff, Inc. (engineering
1251 Avenue of the Americas, firm) (since 1995); President, Continuation Investments Group, Inc.
9/th/ Floor (since 1997); President, Mandrake Group (investment and consulting firm)
New York, NY 10020 (1994-1997); Chairman, MetroCashcard International, Inc. (since 1999);
Age: 57 Director, Hotelivision, Inc. (since 1999); Director, Alliance Group
Services, Inc. (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. (from 1993 to 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 Trustee Retired; Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
913 Franklin Lake Road Inc. (since 1984); Director of UST Master Variable Series, Inc. (from
Franklin Lakes, NJ 07417 1994 to June 1997); and Trustee of the Trust (since 1995).
Age: 75
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other Affiliations
Name and Address Trust During Past 5 Years
---------------- ----- -------------------
<S> <C> <C>
Wolfe J. Frankl Trustee Retired; Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt
2320 Cumberland Road Funds, Inc. (since 1986); Director of UST Master Variable Series, Inc.
Charlottesville, VA 22901-7726 (from 1994 to June 1997); Trustee of the Trust (since 1995); Director,
Age: 79 Deutsche Bank Financial, Inc. (since 1989); Director, The Harbus
Corporation (since 1951); and Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1988).
Morrill Melton Hall, Jr. Director Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Comprehensive Health Services, Inc. (since July 30, 2000); Trustee of the Trust (since July 30, 2000); Chief
8229 Boone Blvd., Suite 700 Executive Officer, Comprehensive Health Services, Inc. (health care
Vienna, VA 22182 management and administration).
Age: 55
Jonathan Piel Trustee Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
558 E. 87th Street (since 1996); Trustee of the Trust and Excelsior Funds (since 1994); Vice
New York, NY 10128 President and Editor, Scientific American, Inc. (from 1986 to 1994);
Age: 61 Director, Group for The South Fork, Bridgehampton, New York (since 1993);
and Member, Advisory Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology (since 1984).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other Affiliations
Name and Address Trust During Past 5 Years
<S> <C> <C>
Robert A. Robinson Trustee Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Church Pension Group (since 1987); Director of UST Master Variable Series, Inc. (from 1994 to
445 Fifth Avenue June 1997); Trustee of the Trust (since 1995); President Emeritus, The
New York, NY 10016 Church Pension Fund and its affiliated companies (since 1966); Trustee,
Age: 74 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).
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: 57
Michael P. Malloy Assistant Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square Secretary
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41
Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global Funds Services Company
Chase Global Funds Secretary (November 1996 to present); and Officer and Manager of Financial
Services Company Reporting, Investors Bank & Trust Company (January 1991 to November 1996).
73 Tremont Street
Boston, MA 02108-3913
Age: 39
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other
Name and Address Trust Affiliations During Past 5 Years
---------------- ----- --------------------------------
<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: 33 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 trustee receives an annual fee of $4,000 from Excelsior
Institutional Trust, and an annual fee of $9,000 from each of Excelsior Funds,
Inc. and Excelsior Tax-Exempt Funds, Inc. plus a meeting fee of $250 from
Excelsior Institutional Trust and $1,500 from each of Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. for each meeting attended and is reimbursed for
expenses incurred in connection with service as a trustee. The Chairman of the
Board is entitled to receive an additional $5,000 per annum from each of the
foregoing Companies for services in such capacity. Prior to December 1999, each
of Messrs. Drake, Piel and Wonham received $4,000 from Excelsior Funds plus a
per-Company meeting fee of $250 and each of these persons was reimbursed for
expenses received in attending meetings of Excelsior Funds. The Chairman of the
Board of Excelsior Funds received $5,000 per annum for services in such
capacity. The trustees may hold various other directorships unrelated to the
Funds. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to the Trust. The employees of CGFSC do
not receive any compensation from the Trust for acting as officers of the Trust.
No person who is currently an officer, director or employee of the Adviser
serves as an officer, director or employee of the Trust. As of July 7, 2000, the
trustees and officers of the Trust as a group owned beneficially less than 1% of
the outstanding shares of each Fund, and less than 1% of the outstanding shares
of all Funds in the aggregate.
51
<PAGE>
The following chart provides certain information about fees received
by the trustees in the most recently completed fiscal year.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS PART ESTIMATED ANNUAL FROM THE TRUST AND
COMPENSATION OF TRUST BENEFITS UPON FUND COMPLEX* PAID
FROM THE TRUST EXPENSES RETIREMENT TO TRUSTEES
-------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Frederick S. Wonham $6,500 None None $52,000(4)**
Rodman L. Drake $5,250 None None $38,750(4)**
Jonathan Piel $5,500 None None $42,000(4)**
Alfred Tannachion $5,250 None None $38,250(3)**
Donald L. Campbell*** $4,000 None None $22,000(3)**
Joseph C. Dugan $5,250 None None $38,250(3)**
Wolfe J. Frankl $5,000 None None $35,000(3)**
Robert A. Robinson $5,500 None None $39,500(3)**
</TABLE>
__________________
* The "Fund Complex" consists of the Trust, Excelsior Funds, Inc., Excelsior
Tax-Exempt Funds, Inc., and, until December 15, 1999, Excelsior Funds.
** Number of investment companies in the Fund Complex for which trustee
served as director or trustee.
*** Donald L. Campbell resigned as a director of the Companies on July 31,
2000.
The Trust Instrument of the Trust provides that the Trust will
indemnify its trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust unless it is finally adjudicated that they engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or unless it is finally adjudicated that they
did not act in good faith in the reasonable belief that their actions were in
the best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested trustees, or in a written opinion of independent counsel, that
such officers or trustees have not engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.
52
<PAGE>
Investment Advisory Services
----------------------------
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, subject to the general
supervision and guidance of the Board of Trustees of the Trust. In the Advisory
Agreements, the Adviser has agreed to provide the services described in the
Prospectuses.
Each Advisory Agreement will continue in effect with respect to each
Fund as long as such continuance is specifically approved at least annually by
the Board of Trustees of the Trust or by a majority vote of the shareholders in
the applicable Fund and, in either case, by a majority of the Trustees of the
Trust who are not parties to the Advisory Agreement or interested persons of any
such party, at a meeting called for the purpose of voting on the Advisory
Agreement. Each investment adviser and administrator has agreed to waive certain
fees.
Each Advisory Agreement provides that the Adviser may render services
to others, and each Advisory Agreement is terminable by the Trust without
penalty on not more than 60 days' nor less than 30 days' written notice when
authorized either by majority vote of the Fund or by a vote of a majority of the
Board of Trustees of the Trust, or by the Adviser on not more than 60 days' nor
less than 30 days' written notice, and will automatically terminate in the event
of its assignment. Each Advisory Agreement provides that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment, or for any act or omission in the
execution of security transactions for a Fund, except that U.S. Trust New York
and U.S. Trust Company shall be jointly, but not severally, liable for willful
misfeasance, bad faith, gross negligence or reckless disregard of their
obligations and duties under the Advisory Agreement.
U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.
For the services provided and expenses assumed pursuant to the
Advisory Agreements, the Adviser is entitled to be paid a fee computed daily and
paid monthly, at the annual rate of 0.65% of the average daily net assets of
each of the Equity, Value Equity,
53
<PAGE>
Optimum Growth, Income and Total Return Bond Funds, and 1.00% of the average
daily net assets of the International Equity 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.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Equity, Income, Total Return Bond, Value Equity and Optimum
Growth Funds pursuant to an advisory agreement substantially similar to the
Advisory Agreement currently in effect for such Funds.
For the fiscal years ended March 31, 2000, 1999 and 1998, the Trust
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>
Equity Fund $867,099 $684,933 $573,251
Value Equity Fund $236,844 $135,038 $104,281
Optimum Growth Fund $534,005 $304,737 $162,368
Income Fund $197,690 $150,590 $129,938
Total Return Bond Fund $710,288 $530,461 $375,215
International Equity Fund* $483,293 $214,663 $ 0
</TABLE>
* U.S. Trust became the Adviser to the International Equity Fund on December
29, 1998.
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 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>
Equity Fund $ 386,474 $ 298,579 $ 250,968
Value Equity Fund $ 71,673 $ 91,255 $ 91,692
Optimum Growth Fund $ 121,458 $ 155,809 $ 119,069
Income Fund $ 324,481 $ 262,853 $ 219,452
Total Return Bond Fund $1,016,516 $ 781,974 $ 600,960
International Equity Fund $ 600,158 $ 355,644 $ 0
</TABLE>
From June 22, 1998 to December 28, 1998, U.S. Trust Company, N.A.
("U.S. Trust, N.A.") served as the International Equity Fund's investment
adviser, pursuant to an advisory agreement substantially similar to the Advisory
Agreement currently in effect for such Fund. Prior to June 22, 1998, U.S. Trust
Company of The Pacific Northwest ("U.S. Trust Pacific") served as investment
adviser to the International Equity Fund pursuant to an advisory agreement
substantially similar to the Advisory Agreement currently in effect for the
Fund.
54
<PAGE>
For the period from June 22, 1998 to December 28, 1998, U.S. Trust,
N.A. received advisory fees of $141,527 with respect to the International Equity
Fund. For the same period, U.S. Trust, N.A. waived advisory fees of $209,295
with respect to the International Equity Fund.
For the period from April 1, 1998 to June 21, 1998, U.S. Trust Pacific
received advisory fees of $38,550 with respect to the International Equity Fund.
For the same period, U.S. Trust Pacific waived advisory fees of $51,988 with
respect to the International Equity Fund.
For the fiscal year ended March 31, 1998, U.S. Trust Pacific received
advisory fees of $215,112 with respect to the International Equity Fund. For the
same period, U.S. Trust Pacific waived advisory fees of $221,324 with respect to
the International Equity Fund.
Prior to December 28, 1998, Harding, Loevner Management, L.P.
("Harding Loevner") served as the International Equity Fund's sub-adviser,
pursuant to an investment sub-advisory agreement (a "Sub-Advisory Agreement")
with U.S. Trust, N.A. Under the Sub-Advisory Agreement, Harding Loevner was
entitled to receive from U.S. Trust, N.A. fees at a maximum annual rate equal to
0.50% of the International Equity Fund's average daily net assets.
Harding Loevner made the day-to-day investment decisions for the
International Equity Fund and placed the purchase and sales orders for
securities transactions of such Fund, subject in all cases to the general
supervision of U.S. Trust, N.A. Harding Loevner furnished at its own expense all
services, facilities and personnel necessary in connection with managing the
International Equity Fund's investments and effecting securities transactions
for such Fund.
For the fiscal year ended March 31, 1999, Harding Loevner received
sub-advisory fees of $135,769 with respect to the International Equity Fund. For
the same period, Harding Loevner waived sub-advisory fees of $84,911 with
respect to the International Equity Fund.
For the fiscal year ended March 31, 1998, Harding Loevner received
sub-advisory fees of $216,523 with respect to the International Equity Fund.
Administrators
--------------
CGFSC, Federated Services Company (an affiliate of the Distributor)
and U.S. Trust Company (together, the "Administrators") serve as the Trust's
administrators and provide the Funds with general administrative and operational
assistance. Until July 31, 2000, Federated Services Company's subsidiary,
Federated Administrative Services, served as administrator to the Trust. On July
31, 2000, Federated Services Company assumed all of its subsidiary's rights and
obligations under the Administration Agreement. 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 values, net income and realized capital
gains or losses, if any, of the Funds. The Administrators prepare semiannual
reports to the SEC, prepare federal and state tax returns, prepare filings with
state
55
<PAGE>
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.
The Administrators also provide administrative services to the
investment portfolios of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
Inc., 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 Trust, Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. (except
for the international portfolios of Excelsior Funds, Inc. 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 Trust and
Excelsior Funds, Inc.) as follows:
Combined Aggregate Average Daily Net Assets
of the Trust, Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. (excluding
the international portfolios of the Trust
and Excelsior Funds, Inc.)
--------------------------
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 Trust, Excelsior Funds, Inc., and Excelsior Tax-Exempt Funds, Inc. 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.
Prior to May 16, 1997, CGFSC, Federated Administrative Services, a
subsidiary of Federated Services Company and U.S. Trust New York served as the
Trust's administrators pursuant to an administration agreement substantially
similar to the administration agreement currently in effect for the Trust.
For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators were paid 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>
Equity Fund $293,462 $231,504 $194,009
Value Equity Fund $ 72,228 $ 53,266 $ 46,129
Optimum Growth Fund $153,552 $108,405 $ 66,246
Income Fund $122,299 $ 83,501 $ 87,287
Total Return Bond Fund $404,662 $ 97,318 $ 82,241
International Equity Fund $216,690 $308,927 $229,777
</TABLE>
56
<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>
Equity Fund $ 0 $ 0 $ 0
Value Equity Fund $ 0 $ 0 $ 0
Optimum Growth Fund $ 0 $ 0 $ 0
Income Fund $ 0 $ 0 $ 0
Total Return Bond Fund $ 0 $ 0 $ 0
International Equity Fund $ 0 $ 0 $12,243
</TABLE>
Shareholder Organizations
-------------------------
The Trust 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 Trust 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.
The Trust's agreements with Shareholder Organizations are governed by
an Administrative Services Plan (the "Plan") adopted by the Trust. Pursuant to
the Plan, the Trust's Board of Trustees will review, at least quarterly, a
written report of the amounts expended under the Trust'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 Trust's Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust (as defined in the 1940
Act) and have no direct or indirect financial interest in such arrangements (the
"Disinterested Trustees").
Any material amendment to the Trust's arrangements with Shareholder
Organizations must be approved by a majority of the Trust's Board of Trustees
(including a majority of the Disinterested Trustees). So long as the Trust's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Trust's Board of Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) will be committed
to the discretion of such Disinterested Trustees.
57
<PAGE>
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 of
Total Paid U.S. Trust
---------- ----------
<S> <C> <C>
Equity Fund $ 0 $ 0
Value Equity Fund $ 0 $ 0
Optimum Growth $13,786 $ 0
Income Fund $ 0 $ 0
Total Return Bond Fund $ 0 $ 0
International Equity Fund $ 0 $ 0
</TABLE>
For the fiscal years ended March 31, 1999 and 1998, the Funds did not
make any payments to Shareholder Organizations.
Expenses
--------
The expenses of the Trust include the compensation of its trustees who
are not affiliated with the Adviser; governmental fees; interest charges; taxes;
fees and expenses of the Adviser and Administrators, of independent auditors, of
legal counsel and of any transfer agent, custodian, registrar or dividend
disbursing agent of the Trust; insurance premiums; and expenses of calculating
the net asset value of, and the net income on, Shares of each Fund.
Expenses of the Trust also include expenses of distributing and
redeeming Shares and servicing shareholder accounts; expenses of preparing,
printing and mailing prospectuses, reports, notices, proxy statements and
reports to shareholders and to governmental offices and commissions; expenses of
shareholder and Trustee meetings; expenses relating to the issuance,
registration and qualification of Shares of each Fund and the preparation,
printing and mailing of prospectuses for such purposes; and membership dues in
the Investment Company Institute allocable to the Trust.
Transfer Agent and Custodian
----------------------------
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
58
<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 the Trust's Board of Trustees 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.
CGFSC serves as transfer agent for the Funds pursuant to a Transfer
Agency Agreement. Under this Agreement, CGFSC has agreed to perform the
following functions, among others: (i) issue and redeem Shares of the Funds;
(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 the Trust's Board of Trustees
concerning the Funds' operations. For its transfer agency and dividend
disbursement services, CGFSC is entitled to receive from the Trust such
compensation as may be agreed upon from time to time between the Trust and
CGFSC. In addition, CGFSC 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.
CGFSC may delegate its transfer agency obligations to another transfer
agent registered or qualified under applicable law, provided that CGFSC shall
remain liable for the performance of all of its transfer agency duties under the
Transfer Agency Agreement, notwithstanding any such delegation.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116 serve as auditors of the Trust. The Funds' Financial Highlights
included in the Prospectuses and the financial statements for the fiscal year
ended March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Trust, and Mr. Malloy, Assistant Secretary of the Trust, are partners), One
Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-6996,
is counsel to the Trust and will pass upon the legality of the Shares offered by
the Prospectuses.
59
<PAGE>
TAXATION
--------
The following supplements the tax information contained in the
Prospectus.
For federal income tax purposes, each series of the Trust 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 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."
Any investment by a Fund in zero coupon bonds, certain securities
purchased at a market discount, and similar instruments will cause a Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, a
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
60
<PAGE>
While certain of the Funds might invest in municipal securities, the
interest on which might otherwise be exempt from tax, it is generally not
expected that any Fund will satisfy the requirements under the Code to pass-
through such exempt income to shareholders as tax-exempt dividends.
Any Fund's transactions in options, futures contracts, and forward
currency exchange contracts will be subject to special tax rules that may affect
the amount, timing, and character of Fund income and distributions to
shareholders. In addition, foreign exchange gains or losses realized by any Fund
will generally be treated as ordinary income or loss by the Fund. Investment by
a Fund in certain "passive foreign investment companies" may also have to be
limited in order to avoid a tax on the Fund. Such a Fund may elect (if such
election is available) to mark to market any investments in "passive foreign
investment companies" on the last day of each year. This election may cause a
Fund to recognize income prior to the receipt of cash payments with respect to
those investments; in order to distribute this income and avoid tax on the Fund,
the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold.
The tax principles applicable to transactions in financial instruments
and futures contacts and options that may be engaged in by the International
Equity 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.
If the International Equity 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. No deduction will be permitted to individuals in
computing their alternative minimum tax liability. If the International Equity
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
61
<PAGE>
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.
DESCRIPTION OF THE TRUST
------------------------
The Trust's Trust Instrument permits the Trustees of the Trust to
issue an unlimited number of full and fractional shares of beneficial interest
(par value $0.00001 per share) of each class of each Fund and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in each Fund. The Trust reserves
the right to create and issue any number of series or classes; investments in
each series participate equally in the earnings, dividends and assets of the
particular series only and no other series. Currently, the Trust has six active
series, although additional series may be established from time to time.
The shares of the Value Equity and Optimum Growth Funds are classified
into two separate classes of shares representing Retail Shares and Institutional
Shares. Retail Shares have different expenses than Institutional Shares which
may affect performance.
Each share (irrespective of class designation) of a Fund represents an
interest in that Fund that is proportionate with the interest represented by
each other share. Shares have no preference, preemptive, conversion or similar
rights. Shares when issued are fully paid and nonassessable, except as set forth
below. Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote and will vote in the aggregate and not by class
or series, except as otherwise expressly required by law. Separate votes,
however, are taken by each class or series on matters affecting an individual
class or series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Shareholders of all
series of the Trust will vote together to elect Trustees of the Trust and for
certain other matters. Under certain circumstances, the shareholders of one or
more series of the Trust could control the outcome of these votes.
The Trust is not required to and has no current intention to hold
annual meetings of shareholders, although the Trust will hold special meetings
of shareholders when in the judgment of the Board of Trustees of the Trust it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have the right to remove one or more Trustees of the Trust at a shareholders
meeting by a vote of two-thirds of the outstanding shares of the Trust.
Shareholders also have the right to remove one or more Trustees of the Trust
without a meeting by a declaration in writing by a specified number of
shareholders. Upon liquidation or dissolution of a Fund, shareholders would be
entitled to share pro rata in the net assets of such Fund available for
distribution to shareholders.
The assets of the Trust received for the issue or sale of the shares
of each class of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such class and series and constitute the underlying assets of such class and
series. The underlying assets of each series are segregated on the books of
62
<PAGE>
account, and are to be charged with the liabilities in respect to such series
and with such a share of the general liabilities of the Trust. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given class or series, or which are general or allocable to two
or more series. In the event of the dissolution or liquidation of the Trust or
any series, the holders of the shares of any series are entitled to receive as a
class the value of the underlying assets of such shares available for
distribution to shareholders.
The Trustees may amend the Trust Instrument without shareholder
approval, except shareholder approval is required for any amendment (a) which
affects the voting rights of shareholders under the Trust Instrument, (b) which
affects shareholders' rights to approve certain amendments to the Trust
Instrument, (c) required to be approved by shareholders by law or the
Registration Statement, or (d) submitted to shareholders for their approval by
the Trustees in their discretion. Pursuant to Delaware business trust law and
the Trust Instrument, the Trustees may, without shareholder approval, (i) cause
the Trust to merge or consolidate with one or more entities, if the surviving or
resulting entity is the Trust or another open-end management investment company
registered under the 1940 Act, or a series thereof, that will succeed to or
assume the Trust's registration under the 1940 Act, or (ii) cause the Trust to
incorporate under the laws of the State of Delaware.
The Trust Instrument provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust unless it
is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices,
or unless it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees, or in a
written opinion of independent counsel, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation on personal liability which is extended to
shareholders of private for profit corporations organized under the General
Corporation Law of the State of Delaware. However, the courts of other states
may not apply Delaware law and shareholders may, under certain circumstances be
held personally liable for the obligations of the Trust. The Trust Instrument
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and provides for indemnification and reimbursement of expenses out
of Fund property for any shareholder held personally liable for the obligations
of a Fund solely by reason of his being or
63
<PAGE>
having been a shareholder. The Trust Instrument also provides for the
maintenance, by or on behalf of the Trust and each Fund, of appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust and each Fund, their shareholders, Trustees,
officers, employees and agents, covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which Delaware law did not
apply, inadequate insurance existed and a Fund itself was unable to meet its
obligations.
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 of July 7, 2000, U.S. Trust and its affiliates held of record
substantially all of the Trust's outstanding shares as agent or custodian for
their customers, but did not own such share beneficially because they did not
have voting investment discretion with respect to such shares.
As of July 7, 2000, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding
Institutional Shares of a Fund were as follows: Equity Fund: PJM Interconnection
DB Plan, c/o United States Trust Company of New York, 114 West 47/th/ Street,
New York, New York, 10036, 9.65%; Value Equity Fund: U.S. Trust Retirement Fund,
c/o United States Trust Company of New York, 114 West 47/th/ Street, New York,
New York, 10036, 81.78%; Optimum Growth Fund: U.S. Trust Retirement Fund, c/o
United States Trust Company of New York, 114 West 47/th/ Street, New York, New
York, 10036, 50.44%; U.S. Trust Company of New York, Trustee FBO U.S. Trust
Plan, U.S. Trust Co. of Pacific Northwest, 4380 S.W. Macadam Avenue, Suite 450,
Portland, Oregon, 97201, 22.00%; International Equity Fund: Planned Parenthood
NY, c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York, 10036, 5.56%; The Liberty Fund, c/o United States Trust Company
of New York, 114 West 47/th/ Street, New York, New York, 10036, 14.87%; and The
Flourence Gould Foundation, c/o United States Trust Company of New York, 114
West 47/th/ Street, New York, New York, 10036, 13.77%; Income Fund: Eugene
Higgins Residuary, c/o United States Trust Company of New York, 114 West 47/th/
Street, New York, New York, 10036, 56.18%; Persimmom Charitable, c/o United
States Trust Company of New York, 114 West 47/th/ Street, New York, New York,
10036, 15.22%; and Planned Parenthood NY, c/o United States Trust Company of New
York, 114 West 47/th/ Street, New York, New York, 10036, 8.77%; Total Return
Bond Fund: The Flourence Gould Foundation, c/o United States Trust Company of
New York, 114 West 47/th/ Street, New York, New York, 10036, 13.16%; and The
Liberty Fund, c/o United States Trust Company of New York, 114 West 47/th/
Street, New York, New York, 10036, 10.32%; and Institutional Money Fund: Robin
Hood Foundation, 111 Broadway, 19/th/ Floor, New York, New York, 10066,
5.36%.
64
<PAGE>
As of July 7, 2000, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding Retail
Shares of a Fund were as follows: Value Equity Fund: George S. Warburg, 820
Hartford Turnpike, Hamden, Connecticut, 06517-1600, 43.00%; William P. Cleary,
9343 246/th/ Street, Floral Park, New York, 11001, 18.97%; and Joan M. McClurg,
6-1 Brooke Club Drive, Ossining, New York, 10562-3698, 11.76%; Optimum Growth
Fund: Avrett Free & Ginsberg, Attn: William Lahr, 800 Third Avenue, New York,
New York, 10022, 18.47%; and Charles Schwab & Co., Inc., Special Custody a/c
for, Attn: Mutual Funds, 101 Montgomery Street, San Francisco, California,
94104, 9.14%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Trust's
Annual Report to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Report") are incorporated into this Statement of Additional
Information by reference. No other parts of the 2000 Annual Report are
incorporated by reference herein. The financial statements included in the 2000
Annual Report have been audited by the Trust's independent auditors, Ernst &
Young LLP, whose reports thereon also appear in the 2000 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 2000
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.
65
<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
are also distinguished
A-1
<PAGE>
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.
A-2
<PAGE>
Fitch 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 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 minimal 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.
-"r" - The "r" highlights obligations that Standard & Poor's believes
A-5
<PAGE>
have significant 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.
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" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
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)
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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 ratings used by Fitch 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.
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"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
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
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-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.
"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.
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"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.
"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.
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"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 uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
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