<PAGE>
As filed with the SEC on August 1, 1995
UST Master Tax-Exempt Funds, Inc. - Registration Nos. 2-93068; 811-4101
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
UST Master Tax-Exempt Funds, Inc: Post-Effective Amendment No. 18 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [x]
ACT OF 1940
UST Master Tax-Exempt Funds, Inc.: Amendment No. 20 [x]
(Exact Name of Registrant as Specified in Charter)
73 Tremont Street
Boston, Massachusetts 02108-3913
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 446-1012
W. Bruce McConnel, III
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this post-effective amendment will become effective (check
appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[*] on (August 1, 1995) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
--------------------------
The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2. The Rule 24f-2 Notice for the
Registrant's fiscal year ended March 31, 1995 was filed on May 26, 1995.
<PAGE>
CROSS-REFERENCE SHEET
---------------------
UST MASTER FUNDS, INC.
(Money Fund, Government Money Fund, Treasury Money Fund)
UST MASTER TAX-EXEMPT FUNDS, INC.
(Short-Term Tax-Exempt Fund)
Form N-1A, Part A, Item Prospectus Caption
----------------------- ------------------
1. Cover Page................................ Cover Page
2. Synopsis.................................. Background and
Expense Summary
3. Financial Highlights...................... Selected Per Share
Data and Ratios;
Performance and
Yield Information
4. General Description of Registrant......... Introduction;
Investment
Objectives and
Policies; Portfolio
Instruments and
Other Investment
Information;
Investment
Limitations;
Description of
Capital Stock
5. Management of the Fund.................... Management of the
Funds; Custodian and
Transfer Agent
6. Capital Stock and
Other Securities........................ How to Purchase and
Redeem Shares;
Dividends and
Distributions;
Taxes; Description
of Capital Stock;
Miscellaneous
7. Purchase of Securities
Being Offered........................... Pricing of Shares;
How to Purchase and
Redeem Shares;
Investor Programs
8. Redemption or Repurchase.................. How to Purchase and
Redeem Shares
9. Pending Legal Proceedings................. Inapplicable
<PAGE>
[LOGO OF UST
APPEARS HERE]
MASTER FUNDS, INC.
MASTER TAX-EXEMPT
Management Investment Companies FUNDS, INC.
-------------------------------------------------------------------------------
Money Fund For initial purchase information, current
Government Money Fund prices, yield and performance information
Treasury Money Fund and existing account information, call (800)
Short-Term Tax-Exempt Fund 446-1012.
(From overseas, call (617) 557-8280.)
73 Tremont Street
Boston, Massachusetts 02108-3913
-------------------------------------------------------------------------------
This Prospectus describes the Service Shares ("Shares") offered by the Money
Fund, Government Money Fund and Treasury Money Fund, three separate diversi-
fied portfolios offered to investors by UST Master Funds, Inc. ("Master Fund")
and the Short-Term Tax-Exempt Fund, a diversified portfolio offered by UST
Master Tax-Exempt Funds, Inc. ("Master Tax-Exempt Fund" and, collectively with
Master Fund, the "Corporation"). Master Fund and Master Tax-Exempt Fund are
open-end, management investment companies. Each portfolio (individually, a
"Fund" and collectively, the "Funds") has its own investment objective and
policies:
MONEY FUND'S investment objective is to seek as high a level of current in-
come as is consistent with liquidity and stability of principal. The Fund will
generally invest in money market instruments, including bank obligations, com-
mercial paper and U.S. Government obligations.
GOVERNMENT MONEY FUND'S investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund will generally invest in short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations.
TREASURY MONEY FUND'S investment objective is to seek current income with li-
quidity and stability of principal. The Fund invests primarily in direct
short-term obligations of the U.S. Treasury and certain agencies or instrumen-
talities of the U.S. Government with a view toward providing interest income
that is generally considered exempt from state and local income taxes. Under
normal market conditions, at least 65% of the Fund's total assets will be in-
vested in direct U.S. Treasury obligations. The Fund will not enter into re-
purchase agreements.
SHORT-TERM TAX-EXEMPT FUND'S investment objective is to seek a moderate level
of current interest income exempt from Federal income taxes consistent with
stability of principal. The Fund (hereinafter referred to as the "Short-Term
Fund") will invest substantially all of its assets in high-quality short-term
Municipal Securities.
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York ("Investment Adviser" or
"U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to the address shown above or by calling (800) 446-1012. The
Statement of Additional Information, as it may be supplemented from time to
time, is incorporated by reference in its entirety into this Prospectus.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT OR AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY OR OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. THE
FUNDS SEEK TO MAINTAIN THEIR NET ASSET VALUE PER SHARE AT $1.00 FOR PURPOSES
OF PURCHASES AND REDEMPTIONS, ALTHOUGH THERE CAN BE NO ASSURANCE THAT THEY
WILL DO SO ON A CONTINUOUS BASIS. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
GOVERNMENT TREASURY
MONEY MONEY MONEY SHORT-TERM
FUND FUND FUND FUND
----- ---------- -------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load on Purchases
(as a percentage of offering price)..... None None None None
Sales Load on Reinvested Dividends....... None None None None
Deferred Sales Load...................... None None None None
Redemption Fees/1/....................... None None None None
Exchange Fees............................ None None None None
ANNUAL FUND OPERATING EXPENSES FOR
SERVICE SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)/2/..... .22% .22% .28% .22%
12b-1 Fees............................... None None None None
Other Operating Expenses
Administrative Servicing Fee............ .03% .03% .02% .03%
Other Expenses.......................... .24% .25% .25% .24%
Total Fund Operating Expenses (after fee
waivers)/2/............................. .49% .50% .55% .49%
</TABLE>
-------
1. The Funds' transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors which is not reflected
in the expense ratios presented herein. Shareholder organizations may charge
their customers transaction fees in connection with redemptions. See "Re-
demption Procedures."
2. The Investment Adviser and Administrators may from time to time voluntarily
waive part of their respective fees, which waivers may be terminated at any
time. Until further notice, the Investment Adviser and/or Administrators in-
tend to voluntarily waive fees in an amount equal to the Administrative Ser-
vicing Fee. Without such fee waivers, "Advisory Fees" would be .25%, .25%,
.30% and .25% and total operating expenses for Service Shares would be .52%,
.53%, .57% and .52% for the Money, Government Money, Treasury Money and
Short-Term Funds, respectively.
2
<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption of your investment at the end of the
following periods.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Fund...................................... $ 5 $16 $27 $62
Government Money Fund........................... 5 16 28 63
Treasury Money Fund............................. 6 18 31 69
Short-Term Fund................................. 5 16 27 62
</TABLE>
The foregoing expense summary and example are intended to assist the investor
in understanding the costs and expenses that an investor in Service Shares of
the Funds will bear directly or indirectly. The expense summary sets forth ad-
visory and other expenses payable with respect to Service Shares of the Funds
for the fiscal year ended March 31, 1995. For more complete descriptions of the
Funds' operating expenses, see "Management of Funds" in this Prospectus and the
financial statements and notes incorporated by reference in the Statement of
Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Service Share outstanding
throughout each period and other performance information derived from the fi-
nancial statements included in Master Fund's and Master Tax-Exempt Fund's An-
nual Reports to Shareholders for the fiscal year ended March 31, 1995 (the "Fi-
nancial Statements"). The information contained in the Financial Highlights for
each period has been audited by Ernst & Young LLP, Master Fund's and Master
Tax-Exempt Fund's independent auditors. It should be read in conjunction with
the Financial Statements.
MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income From
Investment
Operations
Net Investment
Income......... 0.04494 0.02780 0.03234 0.05165 0.07589 0.08454 0.07698 0.06260 0.06123 0.06824
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... 0.00002 0.00000 0.00000 0.00017 0.00001 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total From
Investment
Operations..... 0.04496 0.02780 0.03234 0.05182 0.07590 0.08454 0.07698 0.06260 0.06123 0.06824
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less
Distributions
Dividends From
Net Investment
Income......... (0.04496) (0.02780) (0.03234) (0.05165) (0.07589) (0.08454) (0.07698) (0.06260) (0.06123) (0.06824)
Distributions
From Net
Realized Gain
on Investments. 0.00000 0.00000 0.00000 (0.00019) 0.00000 0.00000 0.00000 0.00000 (0.00001) 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions.. (0.04496) (0.02780) (0.03234) (0.05184) (0.07589) (0.08454) (0.07698) (0.06260) (0.06124) (0.06905)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return..... 4.59% 2.82% 3.25% 5.19% 7.64% 8.71% 7.76% 6.28% 6.30% 7.04%
Ratios/Supplemental
Data
Net Assets, End
of Period
(in millions).. $ 824.58 $ 736.08 $ 784.02 $ 574.27 $ 471.32 $ 432.37 $ 369.69 $ 321.27 $ 373.38 $ 174.21
Ratio of Net
Operating
Expenses to
Average Net
Assets......... 0.49% 0.51% 0.51% 0.51% 0.52% 0.55% 0.56% 0.55% 0.56% 0.60%/2/
Ratio of Gross
Operating
Expenses to
Average Net
Assets......... 0.52% 0.51% 0.51% 0.51% 0.52% 0.55% 0.56% 0.55% 0.56% 0.74%/2/
Ratio of Net
Income to
Average Net
Assets......... 4.49% 2.78% 3.21% 5.11% 7.56% 8.42% 7.71% 6.25% 6.05% 7.41%/2/
</TABLE>
-------
1.Inception date of the Fund was May 3, 1985.
2. Annualized.
4
<PAGE>
GOVERNMENT MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income From
Investment
Operations
Net Investment
Income......... 0.04397 0.02736 0.03205 0.05069 0.07379 0.08379 0.07498 0.06111 0.05941 0.06560
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... 0.00000 0.00000 0.00000 0.00002 0.00008 0.00000 0.00000 (0.00002) 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total From
Investment
Operations..... 0.04397 0.02736 0.03205 0.05071 0.07387 0.08379 0.07498 0.06109 0.05941 0.06560
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less
Distributions
Dividends From
Net Investment
Income......... (0.04397) (0.02736) (0.03205) (0.05069) (0.07379) (0.08379) (0.07498) (0.06111) (0.05941) (0.06560)
Distributions
From Net
Realized Gain
on Investments. 0.00000 0.00000 0.00000 (0.00005) (0.00005) (0.00001) 0.00000 (0.00023) (0.00016) 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions.. (0.04397) (0.02736) (0.03205) (0.05074) (0.07384) (0.08380) (0.07498) (0.06134) (0.05957) (0.06686)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return..... 4.49% 2.77% 3.20% 5.09% 7.31% 8.30% 7.49% 6.44% 6.11% 6.92%
Ratios/Supplemental
Data
Net Assets, End
of Period
(in millions).. $ 725.77 $1,034.94 $ 710.49 $ 740.69 $ 700.22 $ 392.02 $ 241.13 $ 198.32 $ 191.51 $ 63.16
Ratio of Net
Operating
Expenses to
Average Net
Assets......... 0.50% 0.50% 0.50% 0.50% 0.50% 0.57% 0.57% 0.56% 0.56% 0.62%/2/
Ratio of Gross
Operating
Expenses to
Average Net
Assets......... 0.53% 0.50% 0.50% 0.50% 0.50% 0.57% 0.57% 0.56% 0.56% 0.77%/2/
Ratio of Net
Income to
Average Net
Assets......... 4.38% 2.74% 3.20% 5.09% 7.31% 8.30% 7.49% 6.10% 5.81% 7.26%/2/
</TABLE>
-------
NOTES:
1.Inception date of the Fund was May 8, 1985.
2.Annualized.
5
<PAGE>
SHORT-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income From
Investment
Operations
Net Investment
Income......... 0.02825 0.01938 0.02395 0.03849 0.05292 0.05808 0.05348 0.04572 0.04233 0.04171
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... 0.00000 0.00000 0.00000 0.00000 (0.00001) 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total From
Investment
Operations..... 0.02825 0.01938 0.02395 0.03849 0.05291 0.05808 0.05348 0.04572 0.04233 0.04171
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less
Distributions
Dividends From
Net Investment
Income......... (0.02825) (0.01938) (0.02395) (0.03849) (0.05292) (0.05808) (0.05348) (0.04572) (0.04233) (0.04171)
Distributions
From Net
Realized Gain
on Investments. 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions.. (0.02825) (0.01938) (0.02395) (0.03849) (0.05292) (0.05808) (0.05348) (0.04572) (0.04233) (0.04238)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return..... 2.86% 1.96% 2.42% 3.92% 5.42% 5.97% 5.48% 4.67% 4.32% 4.99%
Ratios/Supplemental
Data
Net Assets, End
of Period
(in millions).. $ 814.89 $ 694.58 $ 659.33 $ 666.35 $ 662.34 $ 600.06 $ 525.30 $ 580.98 $ 561.08 $ 296.73
Ratio of Net
Operating
Expenses to
Average Net
Assets......... 0.49% 0.52% 0.52% 0.52% 0.53% 0.55% 0.53% 0.52% 0.54% 0.64%/2/
Ratio of Gross
Operating
Expenses to
Average Net
Assets......... 0.52% 0.52% 0.52% 0.52% 0.53% 0.55% 0.53% 0.52% 0.54% 0.75%/2/
Ratio of Net
Income to
Average Net
Assets......... 2.85% 1.94% 2.39% 3.84% 5.28% 5.79% 5.33% 4.58% 4.18% 5.28%/2/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was May 24, 1985.
2. Annualized.
6
<PAGE>
TREASURY MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1995 1994 1993 1992 1991/1/
--------- --------- --------- --------- ---------
<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. 0.04165 0.02590 0.02987 0.04731 0.00782
Net Gains or (Losses)
on Securities
(both realized and
unrealized).......... 0.00000 0.00000 0.00000 0.00036 0.00001
--------- --------- --------- --------- ---------
Total From Investment
Operations........... 0.04165 0.02590 0.02987 0.04767 0.00783
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income.... (0.04165) (0.02590) (0.02987) (0.04731) (0.00782)
Distributions From Net
Realized Gain on
Investments.......... 0.00000 0.00000 (0.00030) (0.00011) 0.00000
--------- --------- --------- --------- ---------
Total Distributions... (0.04165) (0.02590) (0.03017) (0.04742) (0.00782)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 4.25% 2.62% 3.06% 4.85% 0.78%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions). $ 196.93 $ 254.68 $ 227.79 $ 172.29 $ 110.37
Ratio of Net Operating
Expenses to Average
Net Assets........... 0.55% 0.58% 0.58% 0.52% 0.09%/2/
Ratio of Gross
Operating Expenses to
Average Net Assets... 0.57% 0.58% 0.58% 0.57% 0.60%/2/
Ratio of Net Income to
Average Net Assets... 4.09% 2.59% 2.97% 4.60% 5.98%/2/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was February 13, 1991.
2. Annualized.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser uses its best efforts to achieve the investment objec-
tive of each Fund, although its achievement cannot be assured. The investment
objective of each Fund may not be changed without a vote of the holders of a
majority of the particular Fund's outstanding Shares (as defined under "Miscel-
laneous"). Except as noted below in "Investment Limitations," the investment
policies of each Fund may be changed without a vote of the holders of a major-
ity of the outstanding Shares of such Fund.
Each Fund uses the amortized cost method to value securities in its portfolio
and has a dollar-weighted portfolio maturity not exceeding 90 days.
MONEY FUND
The Money Fund's investment objective is to seek as high a level of current
income as is consistent with liquidity and stability of principal. The Fund
will generally invest in money market instruments, such as bank certificates of
deposit, bankers' acceptances, commercial paper (including variable and float-
ing rate instruments) and corporate bonds with remaining maturities of 13
months or less, as well as obligations issued or guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities and repurchase agreements collateral-
ized by such obligations. Additional information about the Fund's policies and
portfolio instruments is set forth below under "Portfolio Instruments and Other
Investment Information."
GOVERNMENT MONEY FUND
The Government Money Fund's investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund will invest in obligations with remaining maturities of 13 months or less
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements collateralized by such obligations. See "Portfolio
Instruments and Other Investment Information" for information on other portfo-
lio instruments in which the Fund may invest.
TREASURY MONEY FUND
The Treasury Money Fund's investment objective is to seek current income with
liquidity and stability of principal. The Fund invests primarily in direct ob-
ligations of the U.S. Treasury with remaining maturities of 13 months or less,
such as Treasury bills and notes. Under normal market conditions, the Fund will
invest at least 65% of its total assets in direct U.S. Treasury obligations.
The Fund may also from time to time invest in obligations with remaining matu-
rities of 13 months or less 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,
Tennessee Valley Authority and the Student Loan Marketing Association. Income
on direct investments in U.S. Treasury securities and obligations of the afore-
mentioned 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 in-
vestments 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. See "Taxes--State and Local." The Trea-
sury Money Fund will not enter into repurchase agreements.
SHORT-TERM FUND
The Short-Term Fund's investment objective is to seek a moderate level of cur-
rent interest income exempt from Federal income taxes consistent with stability
of principal. The Fund will invest substantially all of its assets in high-
quality debt obligations exempt from Federal income tax issued by or on behalf
of states, territories, and possessions of the United
8
<PAGE>
States, the District of Columbia, and their authorities, agencies, instrumen-
talities, and political subdivisions ("Municipal Securities"). Portfolio secu-
rities in the Fund will generally have remaining maturities of not more than
13 months. (See "Portfolio Instruments and Other Investment Information.")
The Short-Term Fund is designed for investors in relatively high tax brackets
who are seeking a moderate amount of tax-free income with stability of princi-
pal and less price volatility than would normally be associated with interme-
diate-term and long-term Municipal Securities.
The Short-Term Fund invests in Municipal Securities which are determined by
the Investment Adviser to present minimal credit risks. As a matter of funda-
mental policy, except during temporary defensive periods, the Fund will main-
tain 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). However, from time to time on a temporary
defensive basis due to market conditions, the Short-Term Fund may hold
uninvested cash reserves or invest in taxable obligations in such proportions
as, in the opinion of the Investment Adviser, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Should
the 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 depos-
it, commercial paper, and bankers' acceptances; (iv) repurchase agreements
collateralized by U.S. Government obligations or other money market instru-
ments; or (v) securities issued by other investment companies that invest in
high-quality, short-term securities.
The Short-Term Fund may also invest from time to time in "private activity
bonds" (see "Types of Municipal Securities" below), the interest on which is
treated as a specific tax preference item under the Federal alternative mini-
mum tax. Investments in such securities, however, will not exceed under normal
market conditions 20% of the Fund's total assets when added together with any
taxable investments by the Fund.
Although the Short-Term Fund does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Securities the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the Investment Adviser. To
the extent that the Fund's assets are concentrated in Municipal Securities
payable from revenues on similar projects, the Fund will be subject to the pe-
culiar risks presented by such projects to a greater extent than it would be
if the Fund's assets were not so concentrated.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
GOVERNMENT OBLIGATIONS
Government obligations acquired by the Money, Government Money, Treasury
Money and Short-Term Funds include obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. Such investments may in-
clude obligations issued by the Farm Credit System Financial Assistance Corpo-
ration, the Federal Financing Bank, the General Services Administration, Fed-
eral Home Loan Banks, the Tennessee Valley Authority and the Student Loan Mar-
keting Association. 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. Gov-
ernment 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 in-
strumentalities if it is not obligated to do so by law. Obligations of such
instrumentalities will be purchased only when the Investment Adviser believes
that the credit risk with respect to the instrumentality is minimal. The Ap-
pendix to the Statement of Additional Information contains further information
on the various types of U.S. Government obligations.
9
<PAGE>
Securities issued or guaranteed by the U.S. Government have historically in-
volved 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.
As stated above, the Treasury Money Fund will purchase primarily direct obli-
gations of the U.S. Treasury and obligations of those agencies or instrumental-
ities of the U.S. Government interest income from which is generally not sub-
ject to state and local income taxes.
MONEY MARKET INSTRUMENTS
"Money market instruments" that may be purchased by the Money, Government Mon-
ey, and Short-Term Funds in accordance with their investment objectives and
policies stated above 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 de-
posit, 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 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 in-
stitutions having more than $2 billion in total assets at the time of purchase.
Investments in bank obligations of foreign branches of domestic financial in-
stitutions 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 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.
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 impo-
sition of withholding taxes on interest income, possible seizure or national-
ization of foreign deposits, the possible establishment of exchange controls,
or the adoption of other foreign governmental restrictions which might ad-
versely 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 do-
mestic 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
Investment Adviser believes that the credit risk with respect to the instrument
is minimal.
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 in-
strument, demand payment of the principal of the instrument or may resell the
instrument to a third party. The absence of an active secondary market, howev-
er, could make it difficult for a Fund to dispose of the instrument if the is-
suer 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 will in
general invest only in securities that mature within 13 months of date of pur-
chase,
10
<PAGE>
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
("SEC") (see "Additional Information on Portfolio Instruments--Variable and
Floating Rate Instruments" in the Statement of Additional Information).
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.
QUALITY OF INVESTMENTS
The Funds may only invest in: (i) securities in the two highest rating catego-
ries of an NRSRO, provided that if they are rated by more than one Nationally
Recognized Statistical Rating Organization ("NRSRO"), at least one other NRSRO
rates them in one of its two highest categories; and (ii) unrated securities
determined to be of comparable quality at the time of purchase (collectively,
"Eligible Securities"). Except for the Short-Term Fund, a Fund may not invest
more than 5% of its assets in Eligible Securities that are not "First Tier Se-
curities" (as defined below under "Diversification Requirements"). The rating
symbols of the NRSROs which the Fund may use are described in the Appendix to
the Statement of Additional Information.
REPURCHASE AGREEMENTS
The Money, Government Money and Short-Term Funds may agree to purchase portfo-
lio securities subject to the seller's agreement to repurchase them at a mutu-
ally agreed upon date and price ("repurchase agreements"). A Fund will enter
into repurchase agreements only with financial institutions that are deemed to
be creditworthy by the Investment Adviser, pursuant to guidelines established
by the Boards of Directors. No Fund will enter into repurchase agreements with
the Investment Adviser or any of its affiliates. Repurchase agreements with re-
maining maturities in excess of seven days will be considered illiquid securi-
ties and will be subject to the 10% limit applicable to such securities (see
"Investment Limitations" in the Statement of Additional Information).
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, how-
ever, 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.
Income on the repurchase agreements will be taxable.
SECURITIES LENDING
To increase return on their portfolio securities, the Money Fund and Govern-
ment Money Fund 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. Gov-
ernment, 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 as-
sets. There may be risks of delay in receiving additional collateral or in re-
covering 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 Investment Adviser to be of good standing and
when, in the Investment Adviser's judgment, the income to be earned from the
loan justifies the attendant risks.
INVESTMENT COMPANY SECURITIES
In connection with the management of their daily cash positions, the Funds may
invest in securities
11
<PAGE>
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 Short-Term Fund will invest in
securities of investment companies only if such companies invest primarily in
high-quality, short-term Municipal Securities. The Government Money and Trea-
sury Money Funds intend to limit their acquisition of shares of other invest-
ment 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 Investment Company Act of 1940 (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 an-
other 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 in-
vestment 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 accor-
dance with the requirements of the 1940 Act.
TYPES OF MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be held
by the Short-Term Fund are "general obligation" securities and "revenue" secu-
rities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and in-
terest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the pro-
ceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity obligations are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity revenue obli-
gations is usually directly related to the credit standing of the corporate
user of the facility involved.
The Short-Term Fund's portfolio may also include "moral obligation" securi-
ties, which are normally issued by special-purpose public authorities. If the
issuer of moral obligation securities is unable to meet its debt service obli-
gations 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 mu-
nicipality which created the issuer. There is no limitation on the amount of
moral obligation securities that may be held by the Fund.
The Short-Term Fund 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 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 Short-Term Fund intends 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. "Stripped" Municipal Securities are
considered illiquid securities subject to the Fund's 10% restriction on in-
vestments in illiquid securities.
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<PAGE>
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
The Funds may purchase eligible securities on a "when-issued" basis and may
purchase or sell such securities on a "forward commitment" basis. These trans-
actions involve a commitment by a Fund to purchase or sell particular securi-
ties with payment and delivery taking place in the future beyond the normal
settlement date at a stated price and yield. Securities purchased on a "for-
ward commitment" or "when-issued" basis are recorded as an asset and are sub-
ject to changes in value based upon changes in the general level of interest
rates. Absent unusual market conditions, "forward commitments" and "when-
issued" purchases will not exceed 25% of the value of a Fund's total assets,
and the length of such commitments will not exceed 45 days. The Funds do not
intend to engage in "when-issued" purchases or "forward commitments" for spec-
ulative purposes, but only in furtherance of their investment objectives.
In addition, the Short-Term Fund may acquire "stand-by commitments" with re-
spect to Municipal Securities held by it. Under a "stand-by commitment," a
dealer agrees to purchase at the Fund's option specified Municipal Securities
at a specified price. The Short-Term Fund will acquire "stand-by commitments"
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. "Stand-by commitments" acquired by the
Short-Term Fund would be valued at zero in determining the Fund's net asset
value. Further information concerning "stand-by commitments" is contained in
the Statement of Additional Information under "Additional Information on Port-
folio Instruments."
ILLIQUID SECURITIES
No fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (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 deter-
mined by the Investment Adviser, acting under guidelines approved and moni-
tored by the Board, that an adequate trading market exists for that security.
This investment practice could have the effect of increasing the level of il-
liquidity in a Fund during any period that qualified institutional buyers be-
come uninterested in purchasing these restricted securities.
DIVERSIFICATION REQUIREMENTS
Each Fund other than the Short-Term Fund will limit its purchases of any one
issuer's securities (other than U.S. Government obligations and customary de-
mand deposits) to 5% of the Fund's total assets, except that it may invest
more than 5% (but no more than 25%) of its total assets in "First Tier Securi-
ties" of one issuer for a period of up to three business days. First Tier Se-
curities include: (i) securities in the highest rating category by the only
NRSRO rating them, (ii) securities in the highest rating category of at least
two NRSROs, if more than one NRSRO has rated them, (iii) securities that have
no short-term rating, but have been issued by an issuer that has other out-
standing short-term obligations that have been rated in accordance with (i) or
(ii) above and are comparable in priority and security to such securities, and
(iv) certain unrated securities that have been determined to be of comparable
quality to such securities. In addition, each Fund other than the Short-Term
Fund will limit its purchases of "Second Tier Securities" (Eligible Securities
that are not First Tier Securities) of one issuer to the greater of 1% of its
total assets or $1 million.
INVESTMENT LIMITATIONS
The investment limitations set forth below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of the holders
of a majority of the Fund's outstanding Shares (as defined under "Miscellane-
ous").
13
<PAGE>
No Fund may:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, 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; and
2. 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 con-
nection 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 fa-
cilitate 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.
The Treasury Money Fund may not:
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.
* * *
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 limita-
tion.
In Investment Limitation No. 1 above: (a) a security is considered to be is-
sued 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 us-
er; (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.
The Funds are subject to additional investment limitations which are deemed
matters of their fundamental policies and, as such, may not be changed without
a requisite shareholder vote. Among such limitations are a prohibition on con-
centrating investments in a particular industry or group of industries and a
policy of limiting investments in illiquid securities to 10% of a Fund's as-
sets. For a full description of the Funds' additional fundamental investment
limitations, see the Statement of Additional Information.
PRICING OF SHARES
The net asset value of each Fund is determined and the Shares of each Fund
are priced for purchases and redemptions as of 1:00 p.m. (Eastern Time) and
the close of regular trading hours on the New York Stock Exchange (the "Ex-
change"), currently 4:00 p.m. (Eastern Time). Net asset value and pricing for
each Fund are determined on each day the Exchange and the Investment Adviser
are open for trading ("Business Day"). Currently, the holidays which the Funds
observe are 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. Net asset value per Share for purposes of
pricing sales and redemptions is calculated by dividing the value of all secu-
rities and other assets belonging to a Fund, less the liabilities charged to
the Fund, by the number of its outstanding Shares. The assets in each Fund are
valued by the Funds' administrators based upon the amortized cost method.
14
<PAGE>
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by the Companies' spon-
sor and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-
owned subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
PURCHASE OF SHARES
Shares in each Fund are offered without any purchase or redemption charge im-
posed by the Companies. The Distributor has established several procedures for
purchasing Shares in order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by in-
stitutions ("Institutional Investors" and, collectively with Direct Investors,
"Investors"). Shares may also be purchased by customers ("Customers") of the
Investment Adviser, its affiliates and correspondent banks, and other institu-
tions ("Shareholder Organizations") that have entered into shareholder servic-
ing agreements with one of 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 Dis-
tributor all purchase orders for its Customers and to transmit, on a timely ba-
sis, payment for such orders to Mutual Funds Service Company ("MFSC"), the
Funds' sub-transfer agent, in accordance with the procedures agreed to by the
Shareholder Organization and the Distributor. Confirmations of all such Cus-
tomer purchases and redemptions will be sent by MFSC to the particular Share-
holder Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with MFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase and re-
demption orders with the Funds, MFSC will send confirmations of such transac-
tions and periodic account statements directly to Customers. A Shareholder Or-
ganization may also elect to establish its Customers as record holders.
The Companies enter into shareholder servicing agreements with Shareholder Or-
ganizations which agree to provide their Customers various shareholder adminis-
trative services with respect to their Shares (hereinafter referred to as
"Service Organizations"). See "Management of the Funds--Service Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly in accordance with procedures described below un-
der "Purchase Procedures."
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompanying this Prospectus and mailing it, together with a
check payable to UST Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
15
<PAGE>
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from MFSC;
or (c) a letter stating the amount of the investment, the name of the Fund and
the account number in which the investment is to be made. Institutional Invest-
ors may purchase Shares by transmitting their purchase orders to MFSC by tele-
phone at (800) 446-1012 or by terminal access. Institutional Investors must pay
for Shares with Federal funds or funds immediately available to MFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to MFSC. Prior to
making an initial investment by wire, an Investor must telephone MFSC at (800)
446-1012 (from overseas, call (617) 557-8280) for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve Sys-
tem to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
Wire Control Number
UST Master Funds
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Appli-
cation accompanying this Prospectus and forward it to MFSC. Redemptions by In-
vestors will not be processed until the completed Application for purchase of
Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for auto-
matic investment and other cash management services provided. The Companies re-
serve the right to reject any purchase order, in whole or in part, or to waive
any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Funds in accordance with procedures gov-
erning their accounts at the Shareholder Organizations. It is the responsibil-
ity of the Shareholder Organizations to transmit redemption orders to MFSC and
credit such Customer accounts with the redemption proceeds on a timely basis.
Redemption orders for Institutional Investors must be transmitted to MFSC by
telephone at (800) 446-1012 or by terminal access. No charge for wiring redemp-
tion payments to Shareholder Organizations or Institutional Investors is im-
posed by the Companies, although Shareholder Organizations may charge a Custom-
er's account for wiring redemption proceeds. Information relating to such re-
demption services and charges, if any, is available from the Shareholder Orga-
nizations. 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 ad-
viser 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 MFSC).
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<PAGE>
Redemption by Mail
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. 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 an eligible guarantor
institution approved by MFSC 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 secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing MFSC by
wire or telephone to wire the redemption proceeds directly to the Direct In-
vestor's account at any commercial bank in the United States. Direct Investors
who are shareholders of record may redeem Shares by instructing MFSC by tele-
phone to mail a check for redemption proceeds of $500 or more to the share-
holder of record at his or her address of record. Institutional Investors may
also have their Shares redeemed by wire by instructing MFSC by telephone at
(800) 446-1012 or by terminal access. Only redemptions of $500 or more will be
wired to a Direct Investor's account. An $8.00 fee for each wire redemption by
a Direct Investor is deducted by MFSC from the proceeds of the redemption. The
redemption proceeds for Direct Investors must be paid to the same bank and ac-
count as designated on the Application or in written instructions subsequently
received by MFSC.
Investors may request that Shares be redeemed and redemption proceeds wired on
the same day if telephone redemption instructions are received by 1:00 p.m.
(Eastern Time) on the day of redemption. Shares redeemed and wired on the same
day will not receive the dividend declared on the day of redemption. Redemption
requests made after 1:00 p.m. (Eastern Time) will receive the dividend declared
on the day of redemption, and redemption proceeds will be wired the following
Business Day. To request redemption of Shares by wire, Direct Investors should
call MFSC at (800) 446-1012 (from overseas, call (617) 557-8280).
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
17
<PAGE>
proceeds, a Direct Investor must send a written request to the Companies, c/o
MFSC, at the address listed above under "Redemption by Mail." Such request
must be signed by the Direct Investor, with signature guaranteed (see "Redemp-
tion by Mail" above, for details regarding signature guarantees). Further doc-
umentation may be requested.
MFSC and the Distributor reserve the right to refuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by the Compa-
nies, MFSC or the Distributor. THE COMPANIES, MFSC AND THE DISTRIBUTOR WILL
NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELE-
PHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING
TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE COMPANIES WILL USE
SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE IN-
STRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
Redemption by Check
Except as described in "Investor Programs" below, Direct Investors in the
Funds may redeem Shares, without charge, by check drawn on the Direct Invest-
or's particular Fund account. Checks may be made payable to the order of any
person or organization designated by the Direct Investor and must be for
amounts of $500 or more. Direct Investors will continue to earn dividends on
the Shares to be redeemed until the check clears at United States Trust Com-
pany of New York.
Checks are supplied free of charge, and additional checks are sent to Direct
Investors upon request. Checks will be sent only to the registered owner at
the address of record. Direct Investors who want the option of redeeming
Shares by check must indicate this in the Application for purchase of Shares
and must submit a signature card with signatures guaranteed with such Applica-
tion. The signature card is included in the Application for the purchase of
Shares contained in this Prospectus. In order to arrange for redemption by
check after an account has been opened, a written request must be sent to the
Companies, c/o MFSC, at the address listed above under "Redemption by Mail"
and must be accompanied by a signature card with signatures guaranteed (see
"Redemption by Mail" above, for details regarding signature guarantees).
Stop payment instructions with respect to checks may be given to the Compa-
nies by calling (800) 446-1012 (from overseas, call (617) 557-8280). If there
are insufficient Shares in the Direct Investor's account with the Fund to
cover the amount of the redemption check, the check will be returned marked
"insufficient funds," and MFSC will charge a fee of $25.00 to the account.
Checks may not be used to close an account.
If any portion of the Shares to be redeemed represents an investment made by
personal check, the Companies and MFSC reserve the right not to honor the re-
demption until MFSC is reasonably satisfied that the check has been collected
in accordance with the applicable banking regulations which may take up to 15
days. A Direct Investor who anticipates the need for more immediate access to
his or her investment should purchase Shares by Federal funds or bank wire or
by certified or cashier's check. Banks normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds. If a Direct Investor's purchase check is not collected, the
purchase will be cancelled and MFSC will charge a fee of $25.00 to the Direct
Investor's account.
During periods of substantial economic or market change, telephone redemp-
tions may be difficult to complete. If an Investor is unable to contact MFSC
by telephone, the Investor may also deliver the redemption request to MFSC in
writing at the address noted above under "How to Purchase and Redeem Shares--
Redemption by Mail."
Other Redemption Information
Except as provided in "Investor Programs" below, Investors may be required to
redeem Shares in a Fund upon 60 days' written notice if due to investor re-
demptions the balance in the particular account with respect
18
<PAGE>
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 ac-
count 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 also redeem Shares involuntarily or make payment for redemp-
tion in securities if it appears appropriate to do so in light of the Compa-
nies' responsibilities under the Investment Company Act of 1940.
EFFECTIVE TIME OF PURCHASES AND REDEMPTIONS
Purchase orders for Shares which are received and accepted no later than 1:00
p.m. (Eastern Time) on any Business Day will be effective as of 1:00 p.m. and
will receive the dividend declared on the day of purchase as long as MFSC re-
ceives payment in Federal funds prior to the close of regular trading hours on
the Exchange (currently 4:00 p.m., Eastern Time). Purchase orders received and
accepted after 1:00 p.m. (Eastern Time) and prior to 4:00 p.m. (Eastern Time),
on any Business Day for which payment in Federal funds has been received by
4:00 p.m. (Eastern Time), will be effective as of 4:00 p.m., and will begin re-
ceiving dividends the following day. Purchase orders for Shares made by Direct
Investors are not effective until the amount to be invested has been converted
to Federal funds. In those cases in which a Direct Investor pays for Shares by
check, Federal funds will generally become available two Business Days after a
purchase order is received. In certain circumstances, the Companies may not re-
quire that amounts invested by Shareholder Organizations on behalf of their
Customers or by Institutional Investors be converted into Federal funds. Re-
demption orders are executed at the net asset value per Share next determined
after receipt of the order.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by the Companies, ex-
change Shares in any Fund having a value of at least $500 for Service Shares of
any other portfolio offered by the Companies, provided that such other shares
may legally be sold in the state of the investor's residence.
Master Fund currently offers, in addition to the Money Fund, Government Money
Fund and Treasury Money Fund, 17 diversified portfolios:
Short-Term Government Securities Fund, a fund seeking a high level of cur-
rent income by investing principally in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations, and having a dollar-weighted aver-
age portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of cur-
rent interest income by investing principally in investment grade or better
debt obligations and money market instruments, and having a dollar-weighted
average portfolio maturity of 3 to 10 years;
Managed Income Fund, a fund seeking higher current income through invest-
ments in investment grade debt obligations, U.S. Government obligations and
money market instruments;
Equity Fund, a fund seeking primarily long-term capital appreciation through
investments in a diversified portfolio of primarily equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefitting from the availability, develop-
19
<PAGE>
ment and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or companies that are most effective at obtaining and ap-
plying productivity enhancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based companies benefitting from their position as effec-
tive and strong competitors on a global basis;
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations;
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments based in all
countries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
Master Tax-Exempt Fund currently offers, in addition to the Short-Term Fund,
4 other portfolios:
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through in-
vestments in municipal obligations and having a dollar-weighted average port-
folio maturity of 1 to 3 years;
Intermediate-Term Tax-Exempt Fund, a diversified fund seeking a high level
of current income exempt from Federal income taxes through investments in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of three to ten years;
Long-Term Tax-Exempt Fund, a diversified fund attempting to maximize over
time current income exempt from Federal income taxes, investing primarily in
municipal obligations and having a dollar-weighted average portfolio maturity
of 10 to 30 years; and
New York Intermediate-Term Tax-Exempt Fund, a non-diversified fund designed
to provide New York investors with a high level of current income exempt from
Federal and, to the extent possible, New York state and New York City income
taxes; this fund
20
<PAGE>
invests primarily in New York municipal obligations and has a dollar-weighted
average portfolio maturity of three to ten years.
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 of
the Companies. The redemption will be made at the per Share net asset value of
the Shares being redeemed next determined after the exchange request is re-
ceived. The Service Shares of the portfolio to be acquired will be purchased at
the per share net asset value of those shares (plus any applicable sales load)
next determined after acceptance of the exchange request.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in any of the Funds.
For further information regarding the Companies' exchange privileges, share-
holders should call (800) 446-1012 (from overseas, call (617) 557-8280). In-
vestors exercising the exchange privilege with the Companies' portfolios not
described herein should request and review the prospectuses of those portfolios
prior to making an exchange. Such prospectuses may be obtained by calling the
numbers listed above. The Companies may modify or terminate the exchange pro-
gram at any time upon 60 days' written notice to shareholders, and may reject
any exchange request in the amount exceeding $100,000. In order to prevent
abuse of this privilege to the disadvantage of other shareholders, Master Fund
and Master Tax-Exempt Fund reserve the right to limit the number of exchange
requests of Investors and Customers of Shareholder Organizations to no more
than six per year. THE COMPANIES, MFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE
FOR THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REA-
SONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE IN-
STRUCTIONS ARE GENUINE, THE COMPANIES WILL USE SUCH PROCEDURES AS ARE CONSID-
ERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMA-
TION AS TO ACCOUNT REGISTRATION.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a Fund with a value of $10,000 or more may es-
tablish a Systematic Withdrawal Plan. The Investor may request a declining-bal-
ance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Applica-
tion contained in this Prospectus and mail it to MFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling the Distributor at (800) 446-1012 (from overseas, call
(617) 557-8280).
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
RETIREMENT PLANS
Shares are available for purchase by Investors in connection with the follow-
ing tax- deferred prototype retirement plans offered by United States Trust
Company of New York:
IRAs (including "rollovers" from existing retirement plans) for individu-
als 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 re-
demption provisions described above. The minimum initial investment for IRAs is
$250 per
21
<PAGE>
Fund and the minimum subsequent investment is $50 per Fund. Detailed informa-
tion 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 Or-
ganizations.
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 fif-
teenth day, or twice a month, on both days.
To establish an Automatic Investment account, an Investor must complete the
Supplemental Application contained in this Prospectus and mail it to MFSC. An
Investor may cancel his participation in this Program or change the amount of
purchase at any time by mailing written notification to MFSC, P.O. Box 2798,
Boston, MA 02208-2798 and notification will be effective three Business Days
following receipt. The Companies may modify or terminate this privilege at any
time or charge a service fee, although no such fee currently is contemplated.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Funds is declared daily as a dividend to the
persons who are shareholders of the respective Funds immediately after the
1:00 p.m. pricing of Shares on the day of declaration. All such dividends are
paid within ten days after the end of each month or within seven days after the
redemption of all of a shareholder's Shares of a Fund. For dividend purposes, a
Fund's investment income is reduced by accrued expenses directly attributable
to that Fund and the general expenses of the Companies prorated to that Fund on
the basis of its relative net assets. Net realized capital gains, if any, are
distributed at least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of other Shareholder Organiza-
tions will receive dividends and distributions in additional Shares of the Fund
on which the dividend is paid or the distribution made (as determined on the
payable date), unless they have requested in writing (received by MFSC at the
Companies' address prior to the payment date) to receive dividends and distri-
butions in cash. Reinvested dividends and distributions receive the same tax
treatment as those paid in cash.
TAXES
FEDERAL
Each of the Funds qualified for their last taxable year as a "regulated in-
vestment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund expects to so qualify in future years. Such qualification
generally relieves a Fund of liability for Federal income taxes to the extent
its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires, among
other things, that a Fund distribute to its shareholders an amount equal to at
least the sum of 90% of its investment company taxable income and 90% of its
exempt-interest income (if any) net of certain deductions for each taxable
year. In general, a Fund's investment company taxable income will be its tax-
able income (including interest) subject to certain adjustments and excluding
22
<PAGE>
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. The taxable Funds intend to
distribute substantially all of their investment company taxable income each
year. Such dividends will be taxable as ordinary income to Fund shareholders
who are not currently exempt from Federal income taxes, whether such income is
received in cash or reinvested in additional Shares. (Federal income taxes for
distributions to IRAs and qualifying pension plans are deferred under the
Code.) Because all of each Fund's net investment income is expected to be de-
rived from earned interest, it is anticipated that no part of any distributions
will be eligible for the dividends received deduction for corporations.
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 in the event such dividends are actually paid during January of the fol-
lowing year.
The Short-Term Fund: The Short-Term Fund's policy is to pay dividends each
year equal to at least the sum of 90% of its net exempt-interest income and 90%
of its investment company taxable income, if any. Dividends derived from ex-
empt-interest income ("exempt-interest dividends") may be treated by the Fund's
shareholders as items of interest excludable from their gross income under Sec-
tion 103(a) of the Code, unless, under the circumstances applicable to the par-
ticular shareholder, exclusion would be disallowed. (See Statement of Addi-
tional Information under "Additional Information Concerning Taxes.")
If the Short-Term Fund should hold certain "private activity bonds" issued af-
ter August 7, 1986, the portion of dividends paid by the Fund which are attrib-
utable to interest on such bonds must be included in a shareholder's Federal
alternative minimum taxable income, as an item of tax preference, for the pur-
pose of determining liability (if any) for the 26% to 28% alternative minimum
tax for individuals and the 20% alternative minimum tax and the environmental
tax applicable to corporations. Corporate shareholders must also take all ex-
empt-interest dividends into account in determining certain adjustments for
Federal alternative minimum and environmental tax purposes. The environmental
tax applicable to corporations is imposed at the rate of .12% on the excess of
the corporation's modified Federal alternative minimum taxable income over $2
million. Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the tax-
ability of such benefits.
Dividends payable by the Short-Term Fund which are derived from taxable income
or from long-term or short-term capital gains will be subject to Federal income
tax, whether such dividends are paid in the form of cash or additional Shares.
STATE AND LOCAL
The Treasury Money Fund is structured to provide shareholders, to the extent
permissible by Federal and state law, with income that is exempt or excluded
from taxation at the state and local level. Most states--by statute, judicial
decision or administrative action--have taken the position that dividends of a
regulated investment company such as the Treasury Money Fund that are attribut-
able to interest on obligations of the U.S. Treasury and certain U.S. Govern-
ment agencies and instrumentalities (including those authorized for purchase by
the Fund) are the functional equivalent of interest from such obligations and
are, therefore, exempt from state and local income taxes. As a result, substan-
tially all dividends paid by the Treasury Money Fund to shareholders residing
in those states will be exempt or excluded from state income tax.
Nevertheless in some jurisdictions, exempt-interest dividends and other dis-
tributions paid by the Short-Term Fund may be taxable to shareholders under
23
<PAGE>
state or local law as dividend income, even though all or a portion of such
distributions is derived from interest on tax-exempt obligations which, if re-
alized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situa-
tions. Shareholders will be advised annually as to the Federal income tax con-
sequences of distributions made each year.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of the
Companies' Boards of Directors. The Statement of Additional Information con-
tains the names of and general background information concerning the Compa-
nies' directors.
INVESTMENT ADVISER
United States Trust Company of New York serves as the Investment Adviser to
each Fund. U.S. Trust is a state-chartered bank and trust company created by
Special Act of the New York Legislature in 1853. The Investment Adviser pro-
vides trust and banking services to individuals, corporations, and institu-
tions both nationally and internationally, including investment management,
estate and trust administration, financial planning, corporate trust and
agency banking, and personal and corporate banking. The Investment Adviser is
a member bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation and is one of the twelve members of the New York Clearing House
Association.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
The Investment Adviser manages each Fund, makes decisions with respect to and
places orders for all purchases and sales of the Funds' portfolio securities,
and maintains records relating to such purchases and sales. For the services
provided and expenses assumed pursuant to its Investment Advisory Agreements,
the Investment Adviser is entitled to a fee, computed daily and paid monthly,
at the annual rate of .25% of the average daily net assets of each of the Mon-
ey, Government Money and Short-Term Funds. For the services provided and ex-
penses assumed with respect to the Treasury Money Fund, the Investment Adviser
is entitled to an annual fee, computed daily and paid monthly, at the annual
rate of .30% of the Fund's average daily net assets. For the fiscal year ended
March 31, 1995, the Investment Adviser received an advisory fee at the effec-
tive annual rates of .22%, .22%, .22% and .28% of the average daily net assets
of the Money, Government Money, Short-Term and Treasury Money Funds, respec-
tively. For the same period, the Investment Adviser waived advisory fees at
the effective annual rate of .03%, .03%, .03% and .02% of the average daily
net assets of the Money, Government Money, Short-Term and Treasury Money Fund,
respectively.
From time to time, the Investment Adviser may waive (either voluntarily or
pursuant to applicable state expense limitations) all or a portion of the ad-
visory fees payable to it by a Fund, which waiver may be terminated at any
time. See "Management of the Funds--Service Organizations" for additional in-
formation on fee waivers.
ADMINISTRATORS
MFSC and Federated Administrative Services serve as the Funds' administrators
(the "Administrators") and provide them with general administrative and opera-
tional assistance. The Administrators also serve as
24
<PAGE>
administrators of the other portfolios of the Companies, which are also advised
by the Investment Adviser and distributed by the Distributor. For the services
provided to all portfolios of both Companies (except the International, Emerg-
ing Americas, Pacific/Asia and Pan European Funds), the Administrators are en-
titled jointly to annual fees, computed daily and paid monthly, based on the
combined aggregate average daily net assets of the Companies (excluding the In-
ternational, Emerging Americas, Pacific/Asia and Pan European Funds) as fol-
lows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF BOTH COMPANIES
(EXCLUDING THE INTERNATIONAL
EMERGING AMERICAS, PACIFIC/ASIA
AND PAN EUROPEAN FUNDS) ANNUAL FEE
-------------------------------- ----------
<S> <C>
first $200 million.................................................. .200%
next $200 million................................................... .175%
over $400 million................................................... .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of the
Companies are allocated in proportion to their relative average daily net as-
sets at the time of determination. From time to time, the Administrators may
waive (either voluntarily or pursuant to applicable state expense limitations)
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time. See "Management of the Funds--Service
Organizations" for additional information on fee waivers. For the fiscal year
ended March 31, 1995, MFSC and Concord Holding Corporation, the former co-ad-
ministrator, received an aggregate administration fee (under the same compensa-
tion arrangements noted above) at the effective annual rate of .154% of the av-
erage daily net assets of each of the Money, Government Money, Treasury Money
and Short-Term Funds, respectively.
SERVICE ORGANIZATIONS
Each Company will enter into an agreement ("Servicing Agreement") with each
Service Organization requiring it to provide administrative support services to
its Customers beneficially owning Shares. As a consideration for the adminis-
trative services provided to Customers, a Fund will pay the Service Organiza-
tion an administrative service fee at the annual rate of up to .40% of the av-
erage daily net asset value of its Shares held by the Service Organization's
Customers. Such services, which are described more fully in the Statement of
Additional Information under "Management of the Funds--Service Organizations,"
may include assisting in processing purchase, exchange and redemption requests;
transmitting and receiving funds in connection with Customer orders to pur-
chase, exchange or redeem Shares; and providing periodic statements. Under the
terms of the Servicing Agreement, Service Organizations will be required to
provide to Customers a schedule of any fees that they may charge in connection
with a Customer's investment. Until further notice, the Investment Adviser and
Administrators have voluntarily agreed to waive fees payable by a Fund in an
amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distribut-
ing securities such as Shares of the Funds, but such banking laws and regula-
tions do not prohibit such a holding company or affiliate or banks generally
from acting as investment adviser, transfer agent, or custodian to such an in-
vestment company, or from purchasing shares of such company for and upon the
order of customers. The Investment Adviser, MFSC and certain Shareholder Orga-
nizations may be subject to such banking laws and regulations. State securities
laws may differ from the interpretations of Federal law discussed in this para-
graph and banks and financial institutions may be required to register as deal-
ers pursuant to state law.
25
<PAGE>
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would af-
fect their net asset values per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
Master Fund was organized as a Maryland corporation on August 2, 1984. Cur-
rently, Master Fund has authorized capital of 35 billion shares of Common
Stock, $.001 par value per share, classified into 34 series of shares repre-
senting interests in 20 investment portfolios. Master Fund's Charter authorizes
the Board of Directors to classify or reclassify any class of shares of Master
Fund into one or more classes or series. Shares of Class A, Class B and Class G
represent interests in the Money Fund, Government Money Fund and Treasury Money
Fund Funds, respectively.
Master Tax-Exempt Fund was organized as a Maryland corporation on August 8,
1984. Currently, UST Master Tax-Exempt Funds, Inc. has authorized capital of 14
billion shares of Common Stock, $.001 par value per share, classified into 5
classes of shares representing 5 investment portfolios currently being offered.
Master Tax-Exempt Fund's Charter authorizes the Board of Directors to classify
or reclassify any class of shares of Master Tax-Exempt Fund into one or more
classes or series. Shares of Class A Common Stock represent interests in the
Short-Term Fund's Shares.
Each Share represents an equal proportionate interest in the particular Fund
with other shares of the same class, and is entitled to such dividends and dis-
tributions out of the income earned on the assets belonging to such Fund as are
declared in the discretion of the Companies' Boards of Directors.
Shareholders 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 expressly required by law.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has also entered into a sub-transfer agency arrangement with MFSC,
73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC
provides certain transfer agent, dividend disbursement and registrar services
to the Funds.
YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the yields
of the Funds may be quoted and compared to those of other mutual funds with
similar investment objectives and to other relevant indexes or to rankings pre-
pared by independent services or other financial or industry publications that
monitor the performance of mutual funds. For
26
<PAGE>
example, the yields of the Funds may be compared to the applicable averages
compiled by Donoghue's Money Fund Report, a widely recognized independent pub-
lication that monitors the performance of money market 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.
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.
Each Fund may advertise its Shares 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 the
"effective yields" of Shares 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 rein-
vestment.
In addition, the Short-Term Fund may from time to time advertise the "tax-
equivalent yields" of Shares to demonstrate the level of taxable yield neces-
sary to produce an after-tax yield equivalent to that achieved by the Fund.
This yield is computed by increasing the yields of the Fund's Shares (calcu-
lated as above) by the amount necessary to reflect the payment of Federal in-
come taxes at a stated tax rate.
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 pro-
vide an agreed or guaranteed fixed yield for a stated period of time. Share-
holders 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.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
The staff of the SEC has expressed the view that the use of this combined Pro-
spectus for the Funds may subject the Funds to liability for losses arising out
of any statement or omission regarding a particular Fund. The Companies do not
believe, however, that such risk is significant under the circumstances.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of a Company or a particular Fund means, with respect to the
approval of an investment advisory agreement, a distribution plan 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 repre-
sented at the meeting in person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
27
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to: FOR OVERNIGHT DELIVERY: send to:
UST Master Funds UST Master Funds
c/o Mutual Fund Service Company c/o Mutual Funds Service Company--
P.O. Box 2798 Transfer Agent
Boston, MA 02208-2798 73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus enti-
tled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organiza-
tions, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
28
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES
APPEARS HERE] P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other ____________
Note: Joint tenant registration will be as "joint tenants
with right of survivorship" unless otherwise specified. Trust
registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
Registration for Uniform Gifts/Transfers to Minors should be
in the name of one custodian and one minor and include the
state under which the custodianship is created (using the
minor's Social Security Number ("SSN")). For IRA accounts a
different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
[_] U.S. Citizen
------------------------------ [_] Other (specify)____________
City/State/Zip
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
INITIAL INVESTMENT
[_] Money Fund $ ____________ 803
[_] Short-Term Tax-Exempt Fund $ ____________ 806
[_] Government Money Fund $ ____________ 804
[_] Treasury Money Fund $ ____________ 811
TOTAL INITIAL INVESTMENT: $ ____________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ ______ has been sent to the
Fund from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and
dividend distributions will be reinvested in additional
shares unless appropriate boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $500 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ____________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
CHECK WRITING PRIVILEGE
------------------------------------------------------------------
[_] I/We wish to take advantage of the check writing privilege
and have signed and attached the Check Writing Signature
Card to this application.
[_] I/We do not wish to take advantage of the check writing
privilege at this time, but I/we may elect to do so at a
later date.
SIGNATURE CARD SIGNATURE REQUIREMENTS. If the shares are
registered in the name of:
. AN INDIVIDUAL, the individual must sign the Card.
. JOINT ACCOUNT, both individuals must sign the Card.
. INSTITUTIONAL ACCOUNT, an officer must sign the Card
indicating corporate, trust or partnership office or title.
. TRUST ACCOUNT, trustee or other fiduciary must sign the
Card indicating capacity.
. CUSTODIAN FOR MINOR, custodian must sign the Card.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
CHECK WRITING SIGNATURE CARD UST MASTER FUNDS
By signing on the reverse, I/we hereby appoint as agent United States Trust
Company of New York ("U.S. Trust") and, as such agent, U.S. Trust is hereby
authorized and directed, upon presentment of check(s), to request the
redemption of shares of the applicable Fund registered in my/our name(s) in
the amount of such check(s) drawn on my/our Fund account. I/We further
authorize Mutual Funds Service Company ("MFSC"), the transfer agent, to accept
and execute instructions relating to this check writing privilege. I/We agree
that U.S. Trust and MFSC, acting as agents on my/our behalf in connection with
the foregoing check writing privileges, shall be liable only for their own
willful misfeasance, bad faith or gross negligence.
I/We acknowledge that this check writing arrangement is subject to the
applicable terms and restrictions, including charges, set forth in the current
Prospectus for each Fund with respect to which I/we have arranged to redeem
Fund shares by check writing. I/We understand and agree to be bound and
subject to U.S. Trust's rules, regulations and associated laws governing check
collection, as amended from time to time.
Stop payment instructions must be given to MFSC by calling toll-free (800)
446-1012.
To take advantage of the check writing privilege, please complete the
Signature Card on the reverse. Each person signing below guarantees the
genuineness of the other's signature. You will receive a supply of checks
approximately 3 weeks after this application is processed.
<PAGE>
Account Number ___ FUND
_______________ __ [_] Money[_] Short-
Last First Fund Term
Name M.I. Tax-
Exempt
Fund
_______________ __ [_] Government
Money
Fund
[_] Treasury
Last First M.I. Money
Name Fund
By signing this
Signature Card,
the undersigned
agree(s) that the
UST Master Funds
check writing
privileges will
be subject to the
instructions and
rules of Master
Fund, Master Tax-
Exempt Fund and
U.S. Trust, as
now in effect and
as amended from
time to time, as
they pertain to
the use of
redemption
checks.
(Please use black [_] Check here if both signatures required on checks.
ink) [_] Check here if only one signature required on checks.
__________________ If neither box is checked, all checks will require both
Signature signatures.
__________________
Joint Signature UST MASTER FUNDS
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES SUPPLEMENTAL APPLICATION
APPEARS HERE] P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked: All dividends are to be [_] reinvested
[_] paid in cash
All capital gains are to be [_] reinvested
[_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day [_] Monthly on both
the 1st and 15th
days
Amount of each debit (minimum $50 per Fund) $ ________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
----------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by MFSC, acting as my agent for the
purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ---------------- --------- X ------------------ -----------
Signature Date Signature Date
<PAGE>
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of
January, April, July and October
[_] Other______
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make check payable to: Recipient ________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ___________________
account holder of record or mailed
to address other than address of City, State, Zip Code ____________
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
----
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY........................................................... 2
FINANCIAL HIGHLIGHTS...................................................... 4
INVESTMENT OBJECTIVES AND POLICIES........................................ 8
Money Fund............................................................... 8
Government Money Fund.................................................... 8
Treasury Money Fund...................................................... 8
Short-Term Fund.......................................................... 8
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION.................... 9
Government Obligations................................................... 9
Money Market Instruments................................................. 10
Variable and Floating Rate Instruments................................... 10
Quality of Investments................................................... 11
Repurchase Agreements.................................................... 11
Securities Lending....................................................... 11
Investment Company Securities............................................ 11
Types of Municipal Securities............................................ 12
When-Issued and Forward Transactions and Stand-by Commitments............ 13
Illiquid Securities...................................................... 13
Diversification Requirements............................................. 13
INVESTMENT LIMITATIONS.................................................... 13
PRICING OF SHARES......................................................... 14
HOW TO PURCHASE AND REDEEM SHARES......................................... 15
Distributor.............................................................. 15
Purchase of Shares....................................................... 15
Purchase Procedures...................................................... 15
Redemption Procedures.................................................... 16
Effective Time of Purchases and Redemptions.............................. 19
INVESTOR PROGRAMS......................................................... 19
Exchange Privilege....................................................... 19
Systematic Withdrawal Plan............................................... 21
Retirement Plans......................................................... 21
Automatic Investment Program............................................. 22
DIVIDENDS AND DISTRIBUTIONS............................................... 22
TAXES..................................................................... 22
Federal.................................................................. 22
State and Local.......................................................... 23
Miscellaneous............................................................ 24
MANAGEMENT OF THE FUNDS................................................... 24
Investment Adviser....................................................... 24
Administrators........................................................... 24
Service Organizations.................................................... 25
Banking Laws............................................................. 25
DESCRIPTION OF CAPITAL STOCK.............................................. 26
CUSTODIAN AND TRANSFER AGENT.............................................. 26
YIELD INFORMATION......................................................... 26
MISCELLANEOUS............................................................. 27
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION.................................. 28
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OF-
FERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANIES
OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANIES OR BY THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
USTMMP894
[LOGO OF UST APPEARS HERE]
MASTER FUNDS, INC.
MASTER TAX-EXEMPT FUNDS, INC.
MONEY FUND
GOVERNMENT MONEY FUND
TREASURY MONEY FUND
SHORT-TERM TAX-EXEMPT FUND
SERVICE SHARES
Prospectus
August 1, 1995
<PAGE>
CROSS-REFERENCE SHEET
---------------------
UST MASTER TAX-EXEMPT FUNDS, INC.
(Short-Term Tax-Exempt Securities Fund,
Intermediate-Term Tax-Exempt Fund,
Long-Term Tax-Exempt Fund)
Form N-1A, Part A, Item Prospectus Caption
----------------------- ------------------
1. Cover Page................................ Cover Page
2. Synopsis.................................. Background and
Expense Summary
3. Financial Highlights...................... Selected Per Share
Data and Ratios;
Performance and
Yield Information
4. General Description of Registrant......... Prospectus Summary;
Investment
Objectives and
Policies; Portfolio
Instruments and
Other Investment
Information;
Investment
Limitations;
Description of
Capital Stock
5. Management of the Fund.................... Management of the
Fund; Custodian and
Transfer Agent
6. Capital Stock and
Other Securities........................ How to Purchase and
Redeem Shares;
Dividends and
Distributions;
Taxes; Description
of Capital Stock;
Miscellaneous
7. Purchase of Securities
Being Offered........................... Pricing of Shares;
How to Purchase and
Redeem Shares;
Investor Programs
8. Redemption or Repurchase.................. How to Purchase and
Redeem Shares
9. Pending Legal Proceedings................. Inapplicable
<PAGE>
LOGO
A Management Investment Company MASTER TAX-EXEMPT FUNDS,
INC.
-------------------------------------------------------------------------------
Tax-Exempt Funds For initial purchase information, current
prices, yield and performance information
73 Tremont Street and existing account information, call
Boston, Massachusetts 02108-3913 (800) 446-1012. (From overseas, call
(617) 557-8280.)
-------------------------------------------------------------------------------
This Prospectus describes the Service Shares ("Shares") offered by three sepa-
rate diversified portfolios offered to investors by UST Master Tax-Exempt
Funds, Inc. ("Master Tax-Exempt Fund"), an open-end management investment com-
pany. Each portfolio (individually, a "Fund" and collectively, the "Funds")
has its own investment objective and policies as follows:
SHORT-TERM TAX-EXEMPT SECURITIES FUND'S investment objective is to seek as
high a level of current interest income exempt from Federal income taxes as is
consistent with relative stability of principal. The Fund (hereinafter re-
ferred to as the "Short-Term Fund") will invest substantially all of its as-
sets in Municipal Obligations and will ordinarily have a dollar-weighted aver-
age portfolio maturity of one to three years.
INTERMEDIATE-TERM TAX-EXEMPT FUND'S investment objective is to seek as high a
level of current interest income exempt from Federal income taxes as is con-
sistent with relative stability of principal. The Fund (hereinafter referred
to as the "Intermediate-Term Fund") will invest substantially all of its as-
sets in Municipal Obligations and will ordinarily have a dollar-weighted aver-
age portfolio maturity of three to ten years.
LONG-TERM TAX-EXEMPT FUND'S investment objective is to seek to maximize cur-
rent interest income exempt from Federal income taxes. This objective will be
realized over time with a view toward relative stability of principal and
preservation of capital. The Fund (hereinafter referred to as the "Long-Term
Fund") will invest substantially all of its assets in Municipal Obligations
and will generally have a dollar-weighted average portfolio maturity of 10 to
30 years.
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York (the "Investment Adviser"
or "U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information, dated August 1, 1995, and containing additional information about
the Funds, has been filed with the Securities and Exchange Commission. The
current Statement of Additional Information is available to investors without
charge by writing to Master Tax-Exempt Fund at the address shown above or by
calling (800) 446-1012. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in its entirety
into this Prospectus.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT AND AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE COR-
PORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
PROSPECTUS SUMMARY
UST MASTER TAX-EXEMPT FUNDS, INC. is an investment company offering various
diversified and non-diversified investment portfolios with differing objectives
and policies. Founded in 1984, Master Tax-Exempt Fund currently offers five
Funds with combined assets of approximately $1.3 billion. See "Description of
Capital Stock."
INVESTMENT ADVISER: United States Trust Company of New York serves as the
Funds' investment adviser. U.S. Trust whose predecessor was founded in 1853, is
a trust company offering a variety of specialized financial and fiduciary serv-
ices to high-net worth individuals, institutions and corporations. Master Tax-
Exempt Fund offers investors access to U.S. Trust's services. See "Management
of the Funds--Investment Adviser."
INVESTMENT OBJECTIVES AND POLICIES: Generally, each Fund is a diversified in-
vestment portfolio which invests principally in debt obligations exempt from
Federal income tax issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their authorities,
agencies, instrumentalities and political subdivisions. The Funds' investment
objectives and policies are summarized on the cover and explained in greater
detail later in this Prospectus. See "Investment Objectives and Policies,"
"Portfolio Instruments and Other Investment Information," and "Investment Limi-
tations."
HOW TO INVEST: The Funds' shares are offered at their public offering price,
i.e., their net asset value per share plus a sales load which is subject to
substantial reductions for large purchases and programs for accumulation. The
sales load is not applicable to investors making their investments through a
variety of institutions, such as U.S. Trust, other banks and trust companies.
See "How to Purchase and Redeem Shares."
The minimum to start an account is $500 per Fund, with a minimum of $50 per
Fund for subsequent investments. The easiest way to invest is to complete the
account application which accompanies this Prospectus and to send it with a
check to the address noted on the application. Investors may also invest by
wire and through investment dealers or institutional investors with appropriate
sales agreements with Master Tax-Exempt Fund. See "How to Purchase and Redeem
Shares."
HOW TO REDEEM: Redemptions may be requested directly from Master Tax-Exempt
Fund by mail, wire or telephone. Investors investing through another institu-
tion should request redemptions through their Shareholder Organization. See
"How to Purchase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Since the Funds invest in bonds and
other fixed-income securities, they will be affected directly by credit markets
and fluctuations in interest rates. The prices of fixed-income securities gen-
erally fluctuate inversely with changes in interest rates. Although each Fund
generally seeks to invest for the long term, each Fund may engage in short-term
trading of portfolio securities. 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. Investment in the Funds should not be
considered a complete investment program. See "Investment Objectives and Poli-
cies" and "Portfolio Instruments and Other Information".
2
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHORT- INTERMEDIATE- LONG-TERM
TERM FUND TERM FUND FUND
--------- ------------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load on Purchases (as
percentages of offering price)............. 4.50% 4.50% 4.50%
Sales Load on Reinvested Dividends.......... None None None
Deferred Sales Load......................... None None None
Redemption Fees/1/.......................... None None None
Exchange Fees............................... None None None
ANNUAL FUND OPERATING EXPENSES FOR SERVICE
SHARES (AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory Fees (after fee waivers)/2/........ .28% .32% .47%
12b-1 Fees.................................. None None None
Other Operating Expenses
Administrative Servicing Fee.............. .02% .03% .03%
Other Expenses............................ .29% .26% .30%
Total Fund
Operating Expenses (after fee waivers)/2/. .59% .61% .80%
</TABLE>
-------
1. The Funds' transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors, which is not reflected
in the expense ratios presented herein. Shareholder organizations may charge
their customers transaction fees in connection with redemptions. See "Re-
demption Procedures."
2. The Investment Adviser and Administrators may from time to time voluntarily
waive part of their respective fees, which waivers may be terminated at any
time. Until further notice, the Investment Adviser and/or Administrators in-
tend to voluntarily waive fees in an amount equal to the Administrative Ser-
vicing Fee, and to further waive fees and reimburse expenses to the extent
necessary for the Short-Term Fund to maintain an annual expense ratio of not
more than .60%. Without such fee waivers, "Advisory Fees" would be .30%,
.35% and .50% and total operating expenses for Service Shares would be .61%,
.64% and .83% for the Short-Term, Intermediate-Term and Long-Term Funds, re-
spectively.
3
<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual returns, and (2) redemption of your investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term Fund................................. $51 $63 $76 $115
Intermediate-Term Fund.......................... 51 64 77 118
Long-Term Fund.................................. 53 69 87 140
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares of the Funds) are intended to assist the investor in un-
derstanding the costs and expenses that an investor in Service Shares of the
Funds will bear directly or indirectly. The expense summary sets forth advisory
and other expenses payable with respect to Service Shares of the Funds for the
fiscal year ended March 31, 1995, as restated to reflect the additional cost of
administrative servicing fees and the waiver of advisory fees in an amount
equal to such estimated administrative servicing fees. For more complete de-
scriptions of the Funds' operating expenses, see "Management of the Funds" in
this Prospectus and the financial statements and notes incorporated by refer-
ence in the Statement of Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Share outstanding throughout
each period and other performance information, with respect to the Intermedi-
ate-Term and Long-Term Funds, the last five years of which has been derived
from the financial statements included in Master Tax-Exempt Fund's Annual Re-
port to Shareholders for the fiscal year ended March 31, 1995 (the "Financial
Statements"). The information contained in the Financial Highlights for each
period has been audited by Ernst & Young LLP, Master Tax-Exempt Fund's indepen-
dent auditors. It should be read in conjunction with the Financial Statements
and notes thereto. More information about the performance of each Fund is also
contained in the Annual Report to Shareholders which may be obtained from Mas-
ter Tax-Exempt Fund without charge by calling the number on the front cover of
this Prospectus.
SHORT-TERM TAX-EXEMPT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $ 6.99 $ 7.07 $ 7.00
---------- ---------- ------
Income From Investment Operations
Net Investment Income.............. 0.25 0.21 0.05
Net Gains or (Losses) on Securities
(both realized and unrealized).... (0.02) (0.03) 0.07
---------- ---------- ------
Total From Investment Operations... 0.23 0.18 0.12
---------- ---------- ------
Less Distributions
Dividends From Net Investment
Income............................ (0.25) (0.21) (0.05)
Distributions From Net Realized
Gain on Investments............... (0.01) (0.05) 0.00
---------- ---------- ------
Total Distributions................ (0.26) (0.26) (0.05)
---------- ---------- ------
Net Asset Value, End of Period....... $ 6.96 $ 6.99 $ 7.07
========== ========== ======
Total Return/2/...................... 3.45% 2.55% 1.65%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 48.19 $ 57.73 $28.60
Ratio of Net Operating Expenses to
Average Net Assets................ 0.59% 0.59% 0.60%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 0.61% 0.60% 0.84%/3/
Ratio of Net Income to Average Net
Assets............................ 3.60% 2.94% 2.80%/3/
Portfolio Turnover Rate............ 565% 539% 0%
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
5
<PAGE>
INTERMEDIATE-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 8.64 $ 9.24 $ 8.95 $ 8.83 $ 8.67 $ 8.52 $ 8.69 $ 8.87 $ 8.77 $ 8.00
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Income From Investment
Operations.............
Net Investment Income.. 0.37 0.34 0.42 0.49 0.56 0.57 0.55 0.55 0.60 0.17
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 0.16 (0.09) 0.59 0.19 0.16 0.15 (0.17) (0.11) 0.25 0.72
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total From Investment
Operations............ 0.53 0.25 1.01 0.68 0.72 0.72 0.38 0.44 0.85 0.89
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.37) (0.34) (0.42) (0.49) (0.56) (0.57) (0.55) (0.55) (0.60) (0.12)
Distributions From Net
Realized Gain on
Investments........... (0.00) (0.26) (0.30) (0.07) 0.00 0.00 0.00 (0.07) (0.15) 0.00
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00 (0.25) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total Distributions.... (0.37) (0.85) (0.72) (0.56) (0.56) (0.57) (0.55) (0.62) (0.75) (0.12)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Net Asset Value, End of
Period................. $ 8.80 $ 8.64 $ 9.24 $ 8.95 $ 8.83 $ 8.67 $ 8.52 $ 8.69 $ 8.87 $ 8.77
======= ======= ======= ======= ======= ====== ====== ====== ====== ======
Total Return/2/......... 6.34% 2.58% 11.70% 7.95% 8.64% 8.58% 4.49% 5.37% 10.11% 11.19%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $234.99 $298.26 $281.57 $220.92 $122.62 $90.73 $58.29 $53.70 $37.68 $ 6.79
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.61% 0.64% 0.64% 0.64% 0.66% 0.69% 0.68% 0.70% 0.81% 0.62%/3/
Ratio of Gross
Operating Expenses to
Average Net Assets.... 0.64% 0.64% 0.64% 0.64% 0.66% 0.69% 0.68% 0.70% 0.82% 1.33%/3/
Ratio of Net Income to
Average Net Assets.... 4.28% 3.74% 4.57% 5.48% 6.47% 6.48% 6.43% 6.44% 6.10% 7.21%/3/
Portfolio Turnover
Rate.................. 362.0% 379.0% 429.0% 276.0% 216.0% 154.0% 256.0% 290.0% 126.0% 85.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 3, 1985.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
6
<PAGE>
LONG-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 8.87 $ 9.76 $ 9.25 $ 9.15 $ 8.87 $ 8.80 $ 8.68 $ 8.77 $ 8.72 $ 8.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income.. 0.43 0.42 0.46 0.51 0.54 0.55 0.53 0.54 0.63 0.09
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 0.50 (0.12) 0.99 0.30 0.33 0.38 0.32 0.26 0.45 0.66
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations............ 0.93 0.30 1.45 0.81 0.87 0.93 0.85 0.80 1.08 0.75
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.43) (0.42) (0.46) (0.51) (0.54) (0.55) (0.53) (0.54) (0.63) (0.03)
Distributions From Net
Realized Gain on
Investments........... (0.10) (0.50) (0.48) (0.20) (0.05) (0.31) (0.20) (0.35) (0.40) 0.00
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00 (0.27) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.... (0.53) (1.19) (0.94) (0.71) (0.59) (0.86) (0.73) (0.89) (1.03) (0.03)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period................. $ 9.27 $ 8.87 $ 9.76 $ 9.25 $ 9.15 $ 8.87 $ 8.80 $ 8.68 $ 8.77 $ 8.72
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return/2/......... 11.01% 2.38% 16.35% 9.19% 10.11% 10.67% 10.14% 10.15% 13.45% 9.39%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $78.88 $82.15 $85.52 $62.73 $38.04 $36.16 $19.73 $ 8.84 $ 9.36 $ 2.57
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.80% 0.85% 0.86% 0.85% 0.86% 0.92% 0.76% 0.85% 0.80% 0.90%/3/
Ratio of Gross
Operating Expenses to
Average Net Assets.... 0.83% 0.86% 0.86% 0.85% 0.86% 0.92% 0.87% 1.18% 1.24% 1.84%/3/
Ratio of Net Income to
Average Net Assets.... 4.86% 4.25% 4.73% 5.52% 6.01% 5.99% 6.14% 6.37% 6.47% 7.67%/3/
Portfolio Turnover
Rate.................. 214.0% 252.0% 300.0% 218.0% 197.0% 437.0% 550.0% 668.0% 356.0% 134.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was February 5, 1986.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser will use its best efforts to achieve the investment ob-
jective of each Fund, although their achievement cannot be assured. The invest-
ment objective of each Fund is "fundamental," meaning that it may not be
changed without a vote of the holders of a majority of the particular Fund's
outstanding Shares (as defined under "Miscellaneous"). Except as noted below
and in "Investment Limitations," the investment policies of each Fund may be
changed without the vote of the holders of a majority of the outstanding Shares
of such Fund.
SHORT-TERM FUND
The Short-Term Fund's investment objective is to seek as high a level of cur-
rent interest income exempt from Federal income taxes as is consistent with
relative stability of principal. The Fund will invest substantially all of its
assets in debt obligations exempt from Federal income tax issued by or on be-
half of states, territories, and possessions of the United States, the District
of Columbia and their authorities, agencies, instrumentalities, and political
subdivisions ("Municipal Obligations"). Although the Short-Term Fund has no re-
strictions as to the minimum or maximum maturity of any individual Municipal
Obligation, it will generally have a dollar-weighted average portfolio maturity
of one to three years.
INTERMEDIATE-TERM FUND
The Intermediate-Term Fund's investment objective is to seek as high a level
of current interest income exempt from Federal income taxes as is consistent
with relative stability of principal. The Fund will invest substantially all of
its assets in Municipal Obligations. Although the Fund has no restrictions as
to the minimum or maximum maturity of any individual Municipal Obligation, it
will generally have a dollar-weighted average portfolio maturity of three to
ten years.
The Intermediate-Term Fund is designed for investors in relatively high tax
brackets who are seeking greater stability of principal than is generally
available from longer-term Municipal Obligations and who are willing to accept
a somewhat lower yield in order to achieve this stability. Generally, the price
for its Shares will be less volatile than that normally associated with a port-
folio consisting of longer-term Municipal Obligations.
LONG-TERM FUND
The Long-Term Fund's investment objective is to seek to maximize current in-
terest income exempt from Federal income taxes. The Fund will realize this ob-
jective over time with a view toward relative stability of principal and pres-
ervation of capital. The Fund will invest substantially all of its assets in
Municipal Obligations with no maturity restrictions. While the Fund's dollar-
weighted average portfolio maturity may be as long as 30 years, during tempo-
rary defensive periods it could be considerably shorter.
The Long-Term Fund is designed for investors in relatively high tax brackets
who are seeking the highest levels of current tax-free income and who are will-
ing to accept a somewhat higher price volatility than that normally associated
with short-term and intermediate-term Municipal Obligations.
Common Investment Policies
The Funds invest in Municipal Obligations which are determined by the Invest-
ment Adviser to present minimal credit risks. As a matter of fundamental poli-
cy, except during temporary defensive periods, each Fund will maintain at least
80% of its assets in tax-exempt 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 Investment
Adviser, prevailing market or economic conditions may
8
<PAGE>
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 pa-
per, and bankers' acceptances; (iv) repurchase agreements collateralized by
U.S. Government obligations or other money market instruments; (v) municipal
bond index futures and interest rate futures contracts; or (vi) securities is-
sued by other investment companies that invest in high quality, short-term se-
curities.
In seeking to achieve its investment objective, each Fund may invest in "pri-
vate activity bonds" (see "Types of Municipal Obligations" below), the interest
on which is treated as a specific tax preference item under the Federal alter-
native minimum tax. Investments in such securities, however, will not exceed
under normal market conditions 20% of each Fund's total assets when added to-
gether with any taxable investments held by that Fund.
The Municipal Obligations purchased by the Funds will consist of: (1) munici-
pal bonds rated "A" or better by Moody's Investors Service, Inc. ("Moody's") or
by Standard & Poor's Ratings Group ("S&P") or, in certain instances, municipal
bonds with lower ratings if they are deemed by the Investment Adviser to be
comparable to A-rated issues; (2) municipal notes rated "MIG-2" or better
("VMIG-2" or better in the case of variable rate notes) by Moody's or "SP-2" or
better by S&P; and (3) municipal commercial paper rated "Prime-2" or better by
Moody's or "A-2" or better by S&P. If not rated, securities purchased by the
Funds will be of comparable quality to the above ratings as determined by the
Investment Adviser under the supervision of the Board of Directors. A discus-
sion of Moody's and S&P's rating categories is contained in Appendix A to the
Statement of Additional Information.
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 Investment 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.
The value of securities in the Funds can be expected to vary inversely with
changes in prevailing interest rates. The Funds are not intended to constitute
a complete investment program and are not designed for investors seeking capi-
tal appreciation or maximum tax-exempt income irrespective of fluctuations in
principal.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
TYPES OF MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations which may be held
by the Funds are "general obligation" securities and "revenue" securities. Gen-
eral obligation securities are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of principal and interest. Rev-
enue 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 spe-
cial excise tax or other specific revenue source such as the user of the facil-
ity being financed. Private activity bonds held by the Funds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of private activity revenue bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.
The Funds' portfolios may also include "moral obligation" securities, which
are normally issued by
9
<PAGE>
special-purpose public authorities. If the issuer of moral obligation securi-
ties 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 Funds may also purchase custodial receipts evidencing the right to receive
either the principal amount or the periodic interest payments or both with re-
spect 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 re-
ceive. 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 Obli-
gation. 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 in Investment Limitation No. 4 below. Each Fund will limit
its investments in interest-only and principal-only Municipal Obligations to 5%
of its total assets.
FUTURES CONTRACTS
The Funds may purchase and sell municipal bond index and interest rate futures
contracts as a hedge against changes in market conditions. A municipal bond in-
dex assigns values daily to the municipal bonds included in the index based on
the independent assessment of dealer-to-dealer municipal bond brokers. A munic-
ipal bond index futures contract represents a firm commitment by which two par-
ties agree to take or make delivery of an amount equal to a specified dollar
amount times 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 in-
dex is made.
The Funds may enter into contracts for the future delivery of fixed-income se-
curities commonly known as interest rate futures contracts. Interest rate
futures contracts are similar to the municipal bond index futures contracts ex-
cept 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 specula-
tion, 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 Commis-
sion ("CFTC") and the Securities and Exchange Commission ("SEC"). As of the
date of this Prospectus, each Fund intends to limit its hedging transactions in
futures contracts so that, immediately after any such transaction, the aggre-
gate 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.
When investing in futures contracts, the Funds must satisfy certain asset seg-
regation 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 cash and/or certain 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 cash and/or certain liquid assets in an amount equal to the market
value of the securities
10
<PAGE>
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.
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
Investment Adviser to anticipate correctly movements in the direction of the
market. In addition, 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. Further, there is no assurance
that a liquid market will exist for any particular futures contract at any par-
ticular 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. Any income from investments in futures
contracts will be taxable income of the Funds.
MONEY MARKET INSTRUMENTS
"Money market instruments" that may be purchased by the Funds in accordance
with their investment objectives and policies stated above 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 de-
posit, and non-negotiable time deposits earning a specified return and issued
by a U.S. bank which is a member of the Federal Reserve System or insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings and loan association or savings bank which is insured by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. In-
vestments 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 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 In-
vestment 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 in-
strument, demand payment of the principal of the instrument or may resell the
instrument to a third party. The absence of an active secondary market, howev-
er, could make it difficult for the 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.
REPURCHASE AGREEMENTS
As stated above, 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 agree-
ments only with financial institutions such as banks or broker/dealers which
are deemed to be creditworthy by the Investment Adviser under guidelines ap-
proved by Master Tax-Exempt Fund's Board of Directors. No Fund will enter into
repurchase agreements with the Investment 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 in Investment Limitation
No. 4 below.
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
11
<PAGE>
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. Income on the repurchase agreements will be taxable.
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 com-
pany, 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 indi-
rectly 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 Investment Company Act of 1940 (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 securi-
ties.
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
Each of the Funds 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 se-
curities with payment and delivery taking place in the future, beyond the nor-
mal 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 con-
ditions, 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 commit-
ments for speculative purposes, but only in furtherance of their investment
objectives.
In addition, the Funds may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by them. Under a "stand-by commitment," a dealer
agrees to purchase at a Fund's option specified Municipal Obligations at a
specified price. The Funds will acquire "stand-by commitments" solely to facil-
itate portfolio liquidity and do not intend to exercise their rights thereunder
for trading purposes. "Stand-by commitments" acquired by a Fund would be valued
at zero in determining the Fund's net asset value.
ILLIQUID SECURITIES
No Fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (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 prac-
tice could have the effect of increasing the level of illiquidity in a Fund
during any period that qualified institutional buyers become uninterested in
purchasing these restricted securities.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment immediately after its acquisition if
the Investment 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 turn-
12
<PAGE>
over may involve correspondingly greater transaction costs, which must be
borne directly by a Fund and ultimately by its shareholders. Portfolio turn-
over will not be a limiting factor in making portfolio decisions. High portfo-
lio turnover may result in the realization of substantial net capital gains.
To the extent that net short-term capital gains are realized, any distribu-
tions resulting from such gains are considered ordinary income for Federal in-
come tax purposes. (See "Financial Highlights" and "Taxes--Federal.")
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of the holders
of a majority of a Fund's outstanding Shares (as defined under "Miscellane-
ous").
A Fund may not:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, 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;
2. 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 con-
nection 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 con-
tracts 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; and
3. 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 Intermediate-Term Tax-
Exempt and Long-Term 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, instrumentali-
ties, or political subdivisions, and (b) with respect to the Short-Term 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, instrumen-
talities, or political subdivisions.
Each of the Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt Funds may
not:
4. Knowingly invest more than 10% of the value of its total assets in secu-
rities which may be illiquid in light of legal or contractual restrictions on
resale or the absence of readily available market quotations.
* * *
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 in-
vest 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.
In Investment Limitation No. 1 above: (a) a security is considered to be is-
sued 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 us-
er; (b) in certain circumstances, the guarantor of a guar-
13
<PAGE>
anteed security may also be considered to be an issuer in connection with such
guarantee; and (c) securities issued or guaranteed by the United States Govern-
ment, 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.
The Short-Term Tax-Exempt Securities Fund may not 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. This investment policy may be changed by Master
Tax-Exempt Fund's Board of Directors upon reasonable notice to shareholders.
The Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt Funds will not in-
vest more than 25% of the value of their respective total assets in domestic
bank obligations.
With respect to all investment policies, if a percentage limitation is satis-
fied at the time of investment, a later increase or decrease in such percentage
resulting from a change in the value of a Fund's portfolio securities will not
constitute a violation of such limitation.
In order to permit the sale of Shares in certain states, Master Tax-Exempt
Fund may make commitments that are more restrictive than the investment poli-
cies and limitations described above. Should Master Tax-Exempt Fund determine
that any such commitment is no longer in the Funds' best interests, it will re-
voke the commitment by terminating sales of Shares to investors residing in the
state involved.
PRICING OF SHARES
The net asset value of each Fund's Shares is determined and priced for pur-
chases and redemptions at the close of regular trading hours on the New York
Stock Exchange (the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset
value and pricing for each Fund's Shares are determined on each day the Ex-
change and the Investment Adviser are open for trading ("Business Day"). Cur-
rently, the holidays which Master Tax-Exempt Fund observes are New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Inde-
pendence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and
Christmas. Net asset value per share for purposes of pricing sales and redemp-
tions is calculated by dividing the value of all securities and other assets
allocable to a Fund, less the liabilities charged to the Fund, by the number of
its outstanding Shares.
Portfolio securities in the Funds for which market quotations are readily
available (other than debt securities maturing in 60 days or less) are valued
at market value. Securities and other assets for which market quotations are
not readily available are valued at fair value, pursuant to the guidelines
adopted by Master Tax-Exempt Fund's Board of Directors. Absent unusual circum-
stances, 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.
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 trans-
actions 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 ex-
change 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 other assets are valued at fair value pursuant to guidelines adopted by the
Board of Directors.
The Funds' Administrators have undertaken to price the securities in the
Funds' portfolios and may use one or more pricing services to value certain
port-
14
<PAGE>
folio 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 serv-
ices and the valuations so established will be reviewed by the administrators
under the general supervision of the Board of Directors.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by Master Tax-Exempt
Fund's sponsor and distributor, Edgewood Services, Inc. (the "Distributor"), a
wholly-owned subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
PURCHASE OF SHARES
The Distributor has established several procedures for purchasing Shares in
order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by in-
stitutions ("Institutional Investors" and, collectively with Direct Investors,
"Investors"). Shares may also be purchased by customers ("Customers") of the
Investment Adviser, its affiliates and correspondent banks, and other institu-
tions ("Shareholder Organizations") that have entered into shareholder servic-
ing agreements with Master Tax-Exempt Fund. A Shareholder Organization may
elect to hold of record Shares for its Customers and to record beneficial own-
ership 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 orders for its Customers and to transmit, on a
timely basis, payment for such orders to Mutual Funds Service Company ("MFSC"),
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 MFSC to the particular
Shareholder Organization. As an alternative, a Shareholder Organization may
elect to establish its Customers' accounts of record with MFSC. In this event,
even if the Shareholder Organization continues to place its Customers' purchase
and redemption orders with the Funds, MFSC will send confirmations of such
transactions and periodic account statements directly to Customers. A Share-
holder Organization may also elect to establish its Customers as record hold-
ers.
Master Tax-Exempt Fund enters into shareholder servicing agreements with
Shareholder Organizations which agree to provide their Customers various share-
holder administrative services with respect to their Shares (hereinafter re-
ferred to as "Service Organizations"). Shares in the Funds bear the expense of
fees payable to Service Organizations for such services. See "Management of the
Funds--Service Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly from the Distributor in accordance with proce-
dures described below under "Purchase Procedures."
PUBLIC OFFERING PRICE
The public offering price for Shares of each Fund is the sum of the net asset
value of the Shares pur-
15
<PAGE>
chased plus a sales load according to the table below:
<TABLE>
<CAPTION>
REALLOWANCE
TOTAL SALES CHARGE TO DEALER
------------------------------ --------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE VALUE PER SHARE PER SHARE
--------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000................. 4.50% 4.71% 4.00%
$50,000 to $99,999................ 4.00 4.17 3.50
$100,000 to $249,999.............. 3.50 3.63 3.00
$250,000 to $499,999.............. 3.00 3.09 2.50
$500,000 to $999,999.............. 2.00 2.05 1.50
$1,000,000 to $1,999,999.......... 1.00 1.00 .50
$2,000,000 and over............... .50 .50 .25
</TABLE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
At various times the Distributor may implement programs under which a deal-
er's sales force may be eligible to win nominal awards for certain sales ef-
forts or under which the Distributor will reallow to any dealer that sponsors
sales contests or recognition programs conforming to criteria established by
the Distributor, or participates in sales programs sponsored by the Distribu-
tor, an amount not exceeding the total applicable sales charges on the sales
generated by the dealer at the public offering price during such programs. Al-
so, the Distributor in its discretion may from time to time, pursuant to ob-
jective criteria established by the Distributor, pay fees to qualifying deal-
ers 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 condi-
tions. 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. These programs will
not change the price of Shares or the amount that the Funds will receive from
such sales.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations
and partnerships (excluding full service broker/dealers and financial plan-
ners, registered investment advisers and depository institutions not covered
by the exemptions in (d) and (e) below); (d) financial planners and registered
investment advisers not affiliated with or clearing purchases through full
service broker/dealers; (e) purchases of Shares by depository institutions for
their own account as principal; (f) exchange transactions (described below un-
der "Investor Programs-Exchange Privilege") where the Shares being exchanged
were acquired in connection with the distribution of assets held in trust,
agency or custodial accounts maintained with the trust department of a bank;
(g) corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and
Keogh accounts) sponsored by the Distributor and IRA accounts sponsored by the
Investment Adviser; (h) company-sponsored employee pension or retirement plans
making direct investments in the Funds; (i) purchases of Shares by officers,
trustees, directors, employees and retirees of Master Tax-Exempt Fund, UST
Master Funds, Inc. ("Master Fund"), the Investment Adviser, the Distributor or
of any direct or indirect affiliate of any of them; (j) purchases of Shares by
all beneficial shareholders of Master Tax-Exempt Fund or Master Fund as of May
22, 1989; (k) purchases of Shares by investment advisers registered under the
Investment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Tax-Exempt Fund and Master
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investments Limited Partnership; and (n) customers of
certain financial institutions who purchase Shares through a registered repre-
sentative of UST Financial Services Corp. on the premises of their financial
institutions. In addition, no sales load is
16
<PAGE>
charged on the reinvestment of dividends or distributions or in connection with
certain share exchange transactions. Investors who have previously redeemed
shares in an "Eligible Fund" (as defined below) on which a sales load has been
paid also have a one-time privilege of purchasing shares of another "Eligible
Fund" at net asset value without a sales charge, provided that such privilege
will apply only to purchases made within 30 calendar days from the date of re-
demption and only with respect to the amount of the redemption. These exemp-
tions to the imposition of a sales load are due to the nature of the investors
and/or reduced sales effort that will be needed in obtaining investments.
Quantity Discounts
An investor in the Funds may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify MFSC at
the time of purchase that he or she would like to take advantage of any of the
discount plans described below. Upon such notification, the investor will re-
ceive the lowest applicable sales charge. Quantity discounts may be modified or
terminated at any time and are subject to confirmation of an investor's hold-
ings through a check of appropriate records. For more information about quan-
tity discounts, please call (800) 446-1012 or contact your Shareholder Organi-
zation.
Rights of Accumulation. A reduced sales load applies to any purchase of shares
of any portfolio of Master Tax-Exempt Fund and Master Fund that is sold with a
sales load ("Eligible Fund") where an investor's then current aggregate invest-
ment is $50,000 or more. "Aggregate investment" means the total of: (a) the
dollar amount of the then current purchase of shares of an Eligible Fund and
(b) the value (based on current net asset value) of previously purchased and
beneficially owned shares of any Eligible Fund on which a sales load has been
paid. If, for example, an investor beneficially owns shares of one or more Eli-
gible Funds with an aggregate current value of $49,000 on which a sales load
has been paid and subsequently purchases shares of an Eligible Fund having cur-
rent value of $1,000, the load applicable to the subsequent purchase would be
reduced to 4.00% of the offering price. Similarly, with respect to each subse-
quent investment, all shares of Eligible Funds that are beneficially owned by
the investor at the time of investment may be combined to determine the appli-
cable sales load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below and
in the Letter of Intent. To compute the applicable sales load, the offering
price of shares of an Eligible Fund on which a sales load has been paid, bene-
ficially owned by an investor on the date of submission of the Letter of In-
tent, may be used as a credit toward completion of the Letter of Intent. Howev-
er, the reduced sales load will be applied only to new purchases.
MFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load re-
duction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the total purchases. If such re-
mittance is not received within 20 days, MFSC, as attorney-in-fact pursuant to
the terms of the Letter of Intent and at the Distributor's direction, will re-
deem an appropriate number of shares held in escrow to realize the
17
<PAGE>
difference. Signing a Letter of Intent does not bind an investor to purchase
the full amount indicated at the sales load in effect at the time of signing,
but an investor must complete the intended purchase in accordance with the
terms of the Letter of Intent to obtain the reduced sales load. To apply, an
investor must indicate his or her intention to do so under a Letter of Intent
at the time of purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse pur-
chasing securities for his, her or their own account or for the account of any
minor children, or the aggregate investments of a trustee or custodian of any
qualified pension or profit sharing plan or IRA established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompanying this Prospectus and mailing it, together with a
check payable to UST Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from
MFSC; or (c) a letter stating the amount of the investment, the name of the
Fund and the account number in which the investment is to be made. Institu-
tional Investors may purchase Shares by transmitting their purchase orders to
MFSC by telephone at (800) 446-1012 or by terminal access. Institutional In-
vestors must pay for Shares with Federal funds or funds immediately available
to MFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to MFSC. Prior to
making an initial investment by wire, an Investor must telephone MFSC at (800)
446-1012 (from overseas, call (617) 557-8280) for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve Sys-
tem to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
UST Master Funds
Wire Control Number
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Ap-
plication accompanying this Prospectus and forward it to MFSC. Redemptions by
Investors will not be processed until the completed Application for purchase
of Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for au-
tomatic investment
18
<PAGE>
and other cash management services provided. Master Tax-Exempt Fund reserves
the right to reject any purchase order, in whole or in part, or to waive any
minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Funds in accordance with procedures gov-
erning their accounts at the Shareholder Organizations. It is the responsibil-
ity of the Shareholder Organizations to transmit redemption orders to MFSC and
credit such Customer accounts with the redemption proceeds on a timely basis.
Redemption orders for Institutional Investors must be transmitted to MFSC by
telephone at (800) 446-1012 or by terminal access. No charge for wiring redemp-
tion payments to Shareholder Organizations or Institutional Investors is im-
posed by Master Tax-Exempt Fund, 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 ad-
viser or certified financial planner may incur transaction charges in connec-
tion with such redemptions. Such investors should contact their registered in-
vestment adviser or certified financial planner for further information on
transaction fees. Investors may redeem all or part of their Shares in accor-
dance with any of the procedures described below (these procedures also apply
to Customers of Shareholder Organizations for whom individual accounts have
been established with MFSC).
Redemption by Mail
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. 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 MFSC 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 secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing MFSC by
19
<PAGE>
wire or telephone to wire the redemption proceeds directly to the Direct In-
vestor's account at any commercial bank in the United States. Direct Investors
who are shareholders of record may redeem Shares by instructing MFSC by tele-
phone to mail a check for redemption proceeds of $500 or more to the share-
holder of record at his or her address of record. Institutional Investors may
also redeem Shares by instructing MFSC by telephone at (800) 446-1012 or by
terminal access. Only redemptions of $500 or more will be wired to a Direct In-
vestor's account. An $8.00 fee for each wire redemption by a Direct Investor is
deducted by MFSC from the proceeds of the redemption. The redemption proceeds
for Direct Investors must be paid to the same bank and account as designated on
the Application or in written instructions subsequently received by MFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, a Direct Investor must send a written request to Master Tax-Exempt
Fund, c/o MFSC, at the address listed above under "Redemption by Mail." Such
requests must be signed by the Direct Investor, with signatures guaranteed (see
"Redemption by Mail" above, for details regarding signature guarantees). Fur-
ther documentation may be requested.
MFSC and the Distributor reserve the right to re- fuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Master Tax-
Exempt Fund, MFSC or the Distributor. MASTER TAX-EXEMPT FUND, MFSC AND THE DIS-
TRIBUTOR WILL NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING
UPON TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN AT-
TEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER TAX-EXEMPT
FUND WILL USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING
THOSE INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Master Tax-Exempt Fund and MFSC reserve the right not to honor
the redemption until MFSC is reasonably satisfied that the check has been col-
lected in accordance with the applicable banking regulations which may take up
to 15 days. A Direct Investor who anticipates the need for more immediate ac-
cess to his or her investment should purchase Shares by Federal funds or bank
wire or by certified or cashier's check. Banks normally impose a charge in con-
nection with the use of bank wires, as well as certified checks, cashier's
checks and Federal funds. If a Direct Investor's purchase check is not collect-
ed, the purchase will be cancelled and MFSC will charge a fee of $25.00 to the
Direct Investor's account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If an Investor is unable to contact MFSC by tele-
phone, the Investor may also deliver the redemption request to MFSC in writing
at the address noted above under "How to Purchase and Redeem Shares--Redemption
by Mail."
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 re-
demptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Organ-
ization 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.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day. Purchase orders received and accepted after the
close
20
<PAGE>
of regular trading hours on the Exchange are priced at the net asset value per
Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by Master Tax-Exempt
Fund, exchange Shares in any Fund having a value of at least $500 for Service
Shares of any other portfolio offered by Master Tax-Exempt Fund or Master Fund,
provided that such other shares may legally be sold in the state of the invest-
or's residence.
UST Master Funds, Inc. currently offers 20 investment portfolios as follows:
Money Fund, a money market fund seeking as high a level of current income as
is consistent with liquidity and stability of principal through investments
in high-quality money market instruments maturing within 13 months;
Government Money Fund, a money market fund seeking as high a level of cur-
rent income as is consistent with liquidity and stability of principal
through investments in obligations issued or guaranteed by the U.S. Govern-
ment, its agencies and instrumentalities and repurchase agreements collater-
alized by such obligations;
Treasury Money Fund, a money market fund seeking current income generally
exempt from state and local income taxes through investments in direct short-
term obligations issued by the U.S. Treasury and certain agencies or instru-
mentalities of the U.S. Government;
Short-Term Government Securities Fund, a fund seeking a high level of cur-
rent income by investing principally in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations, and having a dollar-weighted aver-
age portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of cur-
rent interest income by investing principally in investment grade or better
debt obligations and money market instruments, and having a dollar-weighted
average portfolio maturity of 3 to 10 years;
Managed Income Fund, a fund seeking higher current income through invest-
ments in investment grade debt obligations, U.S. Government obligations and
money market instruments;
Equity Fund, a fund seeking primarily long-term capital appreciation through
investments in a diversified portfolio of primarily equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefitting from the availability, development
and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or companies that are most effective at obtaining and ap-
plying productivity enhancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
21
<PAGE>
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based companies benefitting from their position as effec-
tive and strong competitors on a global basis;
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations;
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments based in all
countries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
UST Master Tax-Exempt Funds, Inc. offers, in addition to the Funds, two other
portfolios as follows:
Short-Term Tax-Exempt Fund, a diversified tax- exempt money market fund
seeking a moderate level of current interest income exempt from Federal in-
come taxes through investing primarily in high-quality municipal obligations
maturing within 13 months; and
New York Intermediate-Term Tax-Exempt Fund, a non-diversified fund designed
to provide New York investors with a high level of current interest income
exempt from Federal and, to the extent possible, New York state and New York
City income taxes; this fund invests primarily in New York municipal obliga-
tions and has a dollar-weighted average portfolio maturity of three to ten
years.
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 of
Master Tax-Exempt Fund or Master Fund. 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. The Service Shares of the portfolio to be ac-
quired will be purchased at the per share net asset value of those shares (plus
any applicable sales load) next determined after acceptance of the exchange re-
quest. No sales load will be payable on shares to be acquired through an ex-
change to the extent that a sales load was previously paid on the Shares being
exchanged.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in any of the Funds.
For further information regarding Master Tax-Exempt Fund's or Master Fund's ex-
change privilege, shareholders should call (800) 446-1012 (from overseas, call
at (617) 557-8280). Investors exercising the exchange privilege with Master
Tax-Exempt Fund's or Master Fund's portfolios not described herein should re-
quest and review the prospectuses of those portfolios prior to making an
exchange. Such prospectuses may be obtained by calling the telephone numbers
listed above. Master Tax-Exempt Fund may modify or terminate the exchange pro-
gram at any time upon 60 days' written notice to shareholders, and may reject
any exchange request. In order to prevent abuse of this privilege to the disad-
vantage of other sharehold
22
<PAGE>
ers, Master Fund and Master Tax-Exempt Fund reserve the right to limit the num-
ber of exchange requests of Investors and Customers of Shareholder Organiza-
tions to no more than six per year. MASTER TAX-EXEMPT FUND, MFSC AND THE DIS-
TRIBUTOR ARE NOT RESPONSIBLE FOR THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED
BY TELEPHONE THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CON-
FIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER TAX-EXEMPT FUND WILL USE
SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE IN-
STRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
For Federal income tax purposes, an exchange of Shares is a taxable event and,
accordingly, a capital gain or loss may be realized by an investor. Before mak-
ing an exchange, an investor should consult a tax or other financial adviser to
determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a Fund with a value of $10,000 or more may es-
tablish a Systematic Withdrawal Plan. The Investor may request a declining-bal-
ance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Applica-
tion contained in this Prospectus and mail it to MFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling (800) 446-1012 (from overseas, call (617) 557-8280).
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
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 fif-
teenth 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 in-
tervals. This may help Investors to reduce their average cost per share because
the agreed upon fixed investment amount allows more Shares to be purchased dur-
ing periods of lower share prices and fewer Shares during periods of higher
prices. In order to be effective, Dollar Cost Averaging should usually be fol-
lowed 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.
To establish an Automatic Investment account permitting Investors to use the
Dollar Cost Averaging investment method described above, an Investor must com-
plete the Supplemental Application contained in this Prospectus and mail it to
MFSC. An Investor may cancel his participation in this Program or change the
amount of purchase at any time by mailing written notification to MFSC, P.O.
Box 2798, Boston, MA 02208-2798 and notification will be effec-
23
<PAGE>
tive three Business Days following receipt. Master Tax-Exempt Fund 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.
DIVIDENDS AND DISTRIBUTIONS
Each Fund's net income for dividend purposes consists of (i) all accrued in-
come, whether taxable or tax-exempt, plus discount earned on the Fund's assets,
less (ii) amortization of premium on such assets, accrued expenses directly at-
tributable to the Fund, and the general expenses or the expenses common to more
than one Fund (e.g., legal, administrative, accounting, and Directors' fees) of
Master Tax-Exempt Fund, prorated to each Fund on the basis of its relative net
assets.
The net investment income of the Funds is declared daily as a dividend to the
persons who are shareholders of the respective Funds at the opening of business
on the day of declaration. All such dividends are paid within ten days after
the end of each month or within seven days after the redemption of all of a
shareholder's Shares of a Fund. Net realized capital gains are distributed at
least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of other Shareholder Organiza-
tions will receive dividends and distributions in additional Shares of the Fund
on which the dividend or distribution is paid (as determined on the payable
date), unless they have requested in writing (received by MFSC at Master Tax-
Exempt Fund's address prior to the payment date) to receive dividends and dis-
tributions in cash. Reinvested dividends and distributions receive the same tax
treatment as those paid in cash.
TAXES
FEDERAL
Each of the Funds qualified for its last taxable year as a "regulated invest-
ment company" under the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund expects to so qualify in future years. Such qualification generally
relieves a Fund of liability for Federal income taxes to the extent its earn-
ings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires, among
other things, that a Fund distribute to its shareholders an amount equal to at
least the sum of 90% of its investment company taxable income and 90% of its
exempt-interest income (if any), net of certain deductions for each taxable
year. In general, a Fund's investment company taxable income will be its tax-
able income (including interest) 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. It is anticipated that none of
the dividends paid by the Funds will be eligible for the dividends received de-
duction for corporations.
Distribution by a Fund of the excess of its net long-term capital gain over
its net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholder has held the Shares and whether
such gains are received in cash or reinvested in additional Shares.
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 in the event such dividends are actually paid during January of the fol-
lowing year.
An investor considering buying Shares of a Fund on or just before the record
date of a dividend should be aware that the amount of the forthcoming dividend
24
<PAGE>
payment, although in effect a return of capital, will be taxable to them.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. Generally, a shareholder may include sales charges in-
curred 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 such Shares
for Shares of another Fund within 90 days of the purchase and is able to reduce
the sales charges applicable to the new Shares (by virtue of the exchange priv-
ilege), the amount equal to reduction may not be included in the tax basis of
the shareholder's exchanged Shares, but may be included (subject to the limita-
tion) in the tax basis of the new Shares.
Each Fund's policy is to pay dividends each year equal to at least the sum of
90% of its net exempt-interest income and 90% of its investment company taxable
income, if any. Some dividends derived from exempt-interest income ("exempt-in-
terest dividends") may be treated by a Fund's shareholders as items of interest
excludable from their gross income under Section 103(a) of the Code, unless,
under the circumstances applicable to the particular shareholder, exclusion
would be disallowed. (See Statement of Additional Information under "Additional
Information Concerning Taxes.")
If a Fund should hold certain "private activity bonds" issued after August 7,
1986, the portion of dividends paid by the Fund which are attributable to in-
terest on such bonds must be included in a shareholder's Federal alternative
minimum taxable income, as an item of tax preference, for the purpose of deter-
mining liability (if any) for the 26% to 28% alternative minimum tax applicable
to individuals and the 20% alternative minimum tax and the environmental tax
applicable to corporations. Corporate shareholders must also take all exempt-
interest dividends into account in determining certain adjustments under the
Federal alternative minimum tax. The environmental tax applicable to corpora-
tions is imposed at the rate of .12% on the excess of the corporation's modi-
fied Federal alternative minimum taxable income over $2 million. Shareholders
receiving Social Security benefits should note that all exempt-interest divi-
dends will be taken into account in determining the taxability of such bene-
fits.
Dividends payable by the Funds which are derived from taxable income or from
long-term or short-term capital gains will be subject to Federal income tax,
whether such dividends are paid in the form of cash or additional Shares.
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations.
Shareholders will be advised at least annually as to the Federal income tax
consequences of distributions made each year.
STATE AND LOCAL
Exempt-interest dividends and other distributions paid by the Funds may be
taxable to shareholders under state or local law as dividend income, even
though all or a portion of such distributions may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
income taxes. Purchasers are advised to consult their tax advisers concerning
the application of state and local taxes, which may have different consequences
from those of the Federal income tax law described above.
25
<PAGE>
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of Mas-
ter Tax-Exempt Fund's Board of Directors. The Statement of Additional Informa-
tion contains the names of and general background information concerning Master
Tax-Exempt Fund's directors.
INVESTMENT ADVISER
United States Trust Company of New York serves as the Investment Adviser to
each Fund. U.S. Trust (and its predecessor) is a state-chartered bank and trust
company created by Special Act of the New York Legislature in 1853. The Invest-
ment Adviser provides trust and banking services to individuals, corporations,
and institutions both nationally and internationally, including investment man-
agement, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. The Investment Adviser
is a member bank of the Federal Reserve System and the Federal Deposit Insur-
ance Corporation and is one of the twelve members of the New York Clearing
House Association.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
The Investment Adviser manages each Fund, makes decisions with respect to and
places orders for all purchases and sales of each Fund's portfolio securities,
and maintains records relating to such purchases and sales. The Short-Term, In-
termediate-Term and Long-Term Funds' portfolio manager, Kenneth J. McAlley, is
the person primarily responsible for the day-to-day management of the Funds'
investment portfolios. Mr. McAlley, Executive Vice President and Manager of the
Fixed Income Investment Division of U.S. Trust, has been with U.S. Trust since
1980 and has been the Long-Term Fund's portfolio manager since 1986 and the
Short-Term and Intermediate-Term Funds' portfolio manager since 1995.
For the services provided and expenses assumed pursuant to the Investment Ad-
visory Agreements, the Investment Adviser is entitled to be paid a fee, com-
puted daily and paid monthly, at the annual rates of .30% of the average daily
net assets of the Short-Term Fund, .35% of the average daily net assets of the
Intermediate-Term Fund, and .50% of the average daily net assets of the Long-
Term Fund. For the fiscal year ended March 31, 1995, the Investment Adviser re-
ceived an advisory fee at the effective annual rates of .28%, .32% and .47% of
the average daily net assets of the Short-Term, Intermediate-Term and Long-Term
Funds, respectively. For the same period, the Investment Adviser waived advi-
sory fees at the effective annual rate of .02%, .03% and .03% of the average
daily net assets of each of the Short-Term, Intermediate-Term and Long-Term
Funds, respectively.
From time to time, the Investment Adviser may waive (either voluntarily or
pursuant to applicable statutory expense limitations) all or a portion of the
advisory fees payable to it by a Fund, which waiver may be terminated at any
time. See "Management of the Funds--Service Organizations" for additional in-
formation on fee waivers.
ADMINISTRATORS
MFSC, an affiliate of the Investment Adviser, and Federated Administrative
Services serve as the Funds' administrators (the "Administrators") and provide
them with general administrative and operational assistance. The Administrators
also serve as administrators of the other portfolios of Master Tax-Exempt Fund
and Master Fund, which are also advised by the Investment Adviser and distrib-
uted by the Distributor. For the services provided to all portfolios of Master
Tax-Exempt Fund and Master Fund (except the
26
<PAGE>
International, Emerging Americas, Pacific/Asia and Pan European Funds), the Ad-
ministrators are entitled jointly to annual fees, computed daily and paid
monthly, based on the combined aggregate average daily net assets of Master
Tax-Exempt Fund and Master Fund (excluding the International, Emerging Ameri-
cas, Pacific/Asia and Pan European Funds) as follows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF MASTER TAX-EXEMPT
FUND AND MASTER FUND
(EXCLUDING THE INTERNATIONAL,
EMERGING AMERICAS, PACIFIC/ASIA AND
PAN EUROPEAN FUNDS) ANNUAL FEE
----------------------------------- ----------
<S> <C>
first $200 million.................................................. .200%
next $200 million................................................... .175%
over $400 million................................................... .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of Master
Tax-Exempt Fund and Master Fund are allocated in proportion to their relative
average daily net assets at the time of determination. After those allocations
have been made, the Administrators are entitled jointly to an annual minimum
fee of $50,000 from the Short-Term Fund. From time to time, the Administrators
may waive (either voluntarily or pursuant to applicable state expense limita-
tions) all or a portion of the administration fee payable to them by a Fund,
which waiver may be terminated at any time. See "Management of the Funds--Serv-
ice Organizations" for additional information on fee waivers. For the fiscal
year ended March 31, 1995, the MFSC and Concord Holding Corporation ("Con-
cord"), the former co-administrator, received an aggregate administration fee
(under the same compensation arrangements noted above) at the effective annual
rate of .154% of the average daily net assets of each of the Short-Term, Inter-
mediate-Term and Long-Term Funds.
SERVICE ORGANIZATIONS
Master Tax-Exempt Fund will enter into an agreement ("Servicing Agreement")
with each Service Organization requiring it to provide administrative support
services to its Customers beneficially owning Shares. As a consideration for
the administrative services provided to Customers, a Fund will pay the Service
Organization an administrative service fee at the annual rate of up to .40% of
the average daily net asset value of its Shares held by the Service Organiza-
tion's Customers. Such services, which are described more fully in the State-
ment of Additional Information under "Management of the Funds--Service Organi-
zations," may include assisting in processing purchase, exchange and redemption
requests; transmitting and receiving funds in connection with Customer orders
to purchase, exchange or redeem Shares; and providing periodic statements. Un-
der the terms of the Servicing Agreement, Service Organizations will be re-
quired to provide to Customers a schedule of any fees that they may charge in
connection with a Customer's investment. Until further notice, the Investment
Adviser and Administrators have voluntarily agreed to waive fees payable by a
Fund in an amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distribut-
ing securities such as Shares of the Funds, but such banking laws and regula-
tions do not prohibit such a holding company or affiliate or banks generally
from acting as investment adviser, transfer agent, or custodian to such an in-
vestment company, or from purchasing shares of such company for and upon the
order of customers. The Investment Adviser, MFSC and certain Shareholder Orga-
nizations may be subject to such banking laws and regulations. State securities
laws may differ from the interpretations of Federal law discussed in this
27
<PAGE>
paragraph and banks and financial institutions may be required to register as
dealers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would af-
fect their net asset values per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
Master Tax-Exempt Fund was organized as a Maryland corporation on August 8,
1984. Currently, Master Tax-Exempt Fund has authorized capital of 14 billion
shares of Common Stock, $.001 par value per share, classified into 5 classes of
shares representing 5 investment portfolios currently being offered. Master
Tax-Exempt Fund's Charter authorizes the Board of Directors to classify or re-
classify any class of shares of Master Tax-Exempt Fund into one or more classes
or series. Shares of Class B, C and F represent interests in the Short-Term
Tax-Exempt, Intermediate-Term Tax-Exempt, Long-Term Tax-Exempt and Short-Term
Tax-Exempt Securities Funds, respectively.
Each Share represents an equal proportionate interest in the particular Fund
with other Shares of the Fund, and is entitled to such dividends and distribu-
tions out of the income earned on the assets belonging to such Fund as are de-
clared in the discretion of Master Tax-Exempt Fund's Board of Directors.
Shareholders 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 expressly required by law.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has entered into a sub-transfer agency arrangement with MFSC, 73
Tremont Street, Boston, MA 02108-3913, pursuant to which MFSC provides certain
transfer agent, dividend disbursement and registrar services to the Funds.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance and yields of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indexes
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the per-
formance of mutual funds.
Performance and yield data as reported in national financial publications, in-
cluding but not limited to Money Magazine, Forbes, Barron's, The Wall Street
Journal
28
<PAGE>
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the performance and yields of the Funds.
Each Fund may advertise its effective yield which is calculated by dividing
its average daily net investment income per Share during a 30-day (or one
month) base period identified in the advertisement by its maximum offering
price per Share on the last day of the period, and annualizing the result on a
semiannual basis.
In addition, each Fund may from time to time advertise its "tax-equivalent
yield" to demonstrate the level of taxable yield necessary to produce an after-
tax yield equivalent to that achieved by the Fund. This yield is computed by
increasing the yield of the Fund's Shares (calculated as above) by the amount
necessary to reflect the payment of Federal income taxes at a stated tax rate.
From time to time, each Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure re-
flects 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 pe-
riod. 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 commence-
ment of a Fund's operations, or on a year-by-year basis). Each Fund may also
use aggregate total return figures for various periods, representing the cumu-
lative change in the value of an investment in the Fund for the specific peri-
od. Both methods of calculating total return assume that dividends and capital
gain distributions made by a Fund during the period are reinvested in Fund
Shares, and also reflect the maximum sales load charged by the Fund.
Performance and yields will fluctuate and any quotation of performance and
yield should not be considered as representative of a Fund's future perfor-
mance. Since yields fluctuate, yield data cannot necessarily be used to compare
an investment in the Funds with bank deposits, savings accounts and similar in-
vestment 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 condi-
tions. Any fees charged by the Shareholder Organizations with respect to ac-
counts of Customers that have invested in Shares will not be included in calcu-
lations of yield and performance.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Master Tax-Exempt Fund or a particular Fund means, with re-
spect to the approval of an investment advisory agreement, a distribution plan
or a change in a fundamental investment policy, the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of Master Tax-Exempt Fund
or such Fund, or (b) 67% or more of the shares of Master Tax-Exempt Fund or
such Fund present at a meeting if more than 50% of the outstanding shares of
Master Tax-Exempt Fund or such Fund are represented at the meeting in person or
by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
29
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
FOR OVERNIGHT DELIVERY: send to:
UST Master Funds
c/o Mutual Funds Service Company--Transfer Agent
73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus enti-
tled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organiza-
tions, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity.)*
*A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
30
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES
APPEARS HERE] P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other ______________
Note: Joint tenant registration will be as "joint tenants
with right of survivorship" unless otherwise specified. Trust
registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
Registration for Uniform Gifts/Transfers to Minors should be
in the name of one custodian and one minor and include the
state under which the custodianship is created (using the
minor's Social Security Number ("SSN")). For IRA accounts a
different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
[_] U.S. Citizen
------------------------------ [_] Other (specify)____________
City/State/Zip
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
Initial Investment
[_] Short-Term Tax-Exempt
Securities Fund $ ___________825
[_] Intermediate-Term
Tax-Exempt Fund $ ___________807
Initial Investment
[_] Long-Term Tax-Exempt
Fund $ ___________808
[_] Other _____________________ $ ___________
Total Initial Investment: $ ___________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ ____ has been sent to the Fund
from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $500 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ____________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
RIGHTS OF ACCUMULATION
------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this
section, listing all of your accounts including those in your
spouse's name, joint accounts and accounts held for your
minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge
discount described in the Prospectus and Statement of
Additional Information.
[_] I/We own shares of more than one Fund distributed by
Edgewood Services, Inc. Listed below are the numbers of
each of my/our Shareholder Accounts.
[_] The registration of some of my/our shares differs from that
shown on this application. Listed below are the account
number(s) and full registration(s) in each case.
LIST OF OTHER UST MASTER FUND ACCOUNTS:
______________________ _______________________________________
______________________ _______________________________________
______________________ _______________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
------------------------------------------------------------------
LETTER OF INTENT
------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in
the Prospectus. Although I am not obligated to purchase, and
Master Fund is not obligated to sell, I intend to invest,
over a 13-month period beginning on , 19 , an aggregate
amount in Eligible Funds of Master Fund and Master Tax-Exempt
Fund at least equal to (check appropriate box):
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000 [_] $2,000,000
By signing this application, I hereby authorize MFSC to
redeem an appropriate number of shares held in escrow to pay
any additional sales loads payable in the event that I do not
fulfill the terms of this Letter of Intent.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased. We agree to
notify MFSC of any purchases made under the Letter of Intent
or Rights of Accumulation.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES SUPPLEMENTAL APPLICATION
APPEARS HERE] P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked: All dividends are to be [_] reinvested
[_] paid in cash
All capital gains are to be [_] reinvested
[_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day [_] Monthly on both
the 1st and 15th
days
Amount of each debit (minimum $50 per Fund) $ ________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
----------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by MFSC, acting as my agent for the
purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ---------------- --------- X ------------------ -----------
Signature Date Signature Date
<PAGE>
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of
January, April, July and October
[_] Other______
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make check payable to: Recipient ________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ___________________
account holder of record or mailed
to address other than address of City, State, Zip Code ____________
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
----
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 2
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 8
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION..................... 9
INVESTMENT LIMITATIONS..................................................... 13
PRICING OF SHARES.......................................................... 14
HOW TO PURCHASE AND REDEEM SHARES.......................................... 15
INVESTOR PROGRAMS.......................................................... 21
DIVIDENDS AND DISTRIBUTIONS................................................ 24
TAXES...................................................................... 24
MANAGEMENT OF THE FUNDS.................................................... 26
DESCRIPTION OF CAPITAL STOCK............................................... 28
CUSTODIAN AND TRANSFER AGENT............................................... 28
PERFORMANCE AND YIELD INFORMATION.......................................... 28
MISCELLANEOUS.............................................................. 29
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION................................... 30
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OF-
FERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANIES
OR BY THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANIES OR BY THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
USTTXXP894
[LOGO OF UST MASTER TAX-EXEMPT FUNDS, INC. APPEARS HERE]
MASTER TAX-EXEMPT FUNDS, INC.
SHORT-TERM TAX-EXEMPT SECURITIES FUND
INTERMEDIATE-TERM TAX-EXEMPT FUND
LONG-TERM TAX-EXEMPT FUND
SERVICE SHARES
Prospectus
August 1, 1995
<PAGE>
CROSS-REFERENCE SHEET
---------------------
UST MASTER TAX-EXEMPT FUNDS, INC.
(New York Intermediate-Term Tax-Exempt Fund)
Form N-1A, Part A, Item Prospectus Caption
----------------------- ------------------
1. Cover Page................................ Cover Page
2. Synopsis.................................. Background and
Expense Summary
3. Financial Highlights...................... Selected Per Share
Data and Ratios;
Performance and
Yield Information
4. General Description of Registrant......... Introduction;
Investment
Objectives and
Policies; Portfolio
Instruments and
Other Investment
Information;
Investment
Limitations;
Description of
Capital Stock
5. Management of the Fund.................... Management of the
Fund; Custodian and
Transfer Agent
6. Capital Stock and
Other Securities........................ How to Purchase and
Redeem Shares;
Dividends and
Distributions;
Taxes; Description
of Capital Stock;
Miscellaneous
7. Purchase of Securities
Being Offered........................... Pricing of Shares;
How to Purchase and
Redeem Shares;
Investor Programs
8. Redemption or Repurchase.................. How to Purchase and
Redeem Shares
9. Pending Legal Proceedings................. Inapplicable
<PAGE>
LOGO
A Management Investment Company MASTER TAX-EXEMPT FUNDS,
INC.
-------------------------------------------------------------------------------
New York Intermediate-Term For initial purchase information, current
Tax-Exempt Fund prices, yield and performance information
and existing account information, call (800)
73 Tremont Street 446-1012. (From overseas, call (617) 557-
Boston, Massachusetts 02108-3913 8280.)
-------------------------------------------------------------------------------
This Prospectus describes the Service Shares ("Shares") offered by the New
York Intermediate-Term Tax-Exempt Fund (the "Fund"), a non-diversified invest-
ment portfolio offered to investors by UST Master Tax-Exempt Funds, Inc.
("Master Tax-Exempt Fund"), an open-end management investment company.
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND'S investment objective is to pro-
vide New York investors with as high a level of current interest income 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 relative stability
of principal. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in New York Municipal Obligations. Although the Fund
has no restrictions as to the minimum or maximum maturity of any individual
security it may hold, it will have a dollar-weighted average portfolio matu-
rity of 3 to 10 years.
Edgewood Services, Inc. sponsors the Fund and serves as its distributor and
United States Trust Company of New York (the "Investment Adviser" or "U.S.
Trust") serves as the Fund's investment adviser.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Fund has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Master Tax-Exempt Fund at its address shown above or by
calling (800) 446-1012. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in its entirety
into this Prospectus.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY, ITS PARENT AND AFFILIATES AND THE
SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHER-
WISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORA-
TION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
NEW YORK
INTERMEDIATE-TERM
TAX-EXEMPT FUND
-----------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load on Purchases (as percentage of offering
price)...................................................... 4.50%
Sales Load on Reinvested Dividends........................... None
Deferred Sales Load.......................................... None
Redemption Fees/1/........................................... None
Exchange Fee................................................. None
ANNUAL FUND OPERATING EXPENSES FOR SERVICE SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Advisory Fees (after fee waivers)/2/......................... .48%
12b-1 Fees................................................... None
Other Operating Expenses
Administrative Servicing Fee................................ .02%
Other Expenses.............................................. .28%
Total Fund Operating Expenses (after fee waivers)/2/......... .78%
</TABLE>
-------
1. The Fund's transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors which is not reflected
in the estimated expense ratios presented herein. Shareholder organizations
may charge their customers transaction fees in connection with redemptions.
See "Redemption Procedures."
2. The Investment Adviser and Administrators may from time to time voluntarily
waive part of their respective fees, which waivers may be terminated at any
time. Until further notice, the Investment Adviser and/or Administrators in-
tend to voluntarily waive fees in an amount equal to the Administrative Ser-
vicing Fee. Without such fee waivers, "Advisory Fee" would be .50% and total
operating expenses for Service Shares would be .80% for the Fund.
Example: You would pay the following estimated expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption of your investment at the end
of the following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
New York Intermediate-Term Tax-Exempt Fund...... $53 $69 $86 $137
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares) are intended to assist the investor in understanding the
costs and expenses that an investor in Service Shares of the Fund will bear di-
rectly or indirectly. The expense summary sets forth advisory and other ex-
penses payable with respect to Service Shares of the Fund for the fiscal year
ended March 31, 1995, as restated to reflect the additional cost of administra-
tive servicing fees and the waiver of advisory fees in an amount equal to such
estimated administrative servicing fees. For more complete descriptions of the
Fund's operating expenses, see "Management of the Fund" in this Prospectus and
the financial statements and notes incorporated by reference in the Statement
of Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following table includes selected data for a Service Share outstanding
throughout each period and other performance information derived from the fi-
nancial statements included in Master Tax-Exempt Fund's Annual Report to Share-
holders for the fiscal year ended March 31, 1995 (the "Financial Statements").
The information contained in the Financial Highlights for each period has been
audited by Ernst & Young LLP, Master Tax- Exempt Fund's independent auditors.
It should be read in conjunction with the Financial Statements and notes there-
to. More information about the performance of the Fund is also contained in the
Annual Report to Shareholders, which may be obtained from Master Tax-Exempt
Fund without charge by calling the number on the front cover of this Prospec-
tus.
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1995 1994 1993 1992 1991/1/
------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................. $ 8.18 $ 8.61 $ 8.31 $ 8.20 $ 8.00
------ ------- ------ ------ ------
Income From Investment Operations
Net Investment Income............. 0.33 0.31 0.34 0.41 0.39
Net Gains or (Losses) on
Securities (both realized and
unrealized)...................... 0.15 (0.13) 0.41 0.19 0.20
------ ------- ------ ------ ------
Total From Investment Operations.. 0.48 0.18 0.75 0.60 0.59
------ ------- ------ ------ ------
Less Distributions
Dividends From Net Investment
Income........................... (0.33) (0.31) (0.34) (0.41) (0.39)
Distributions From Net Realized
Gain on Investments.............. (0.09) (0.22) (0.11) (0.08) 0.00
Distributions in Excess of Net
Realized Gain on Investments..... 0.00 (0.08) 0.00 0.00 0.00
------ ------- ------ ------ ------
Total Distributions................ (0.42) (0.61) (0.45) (0.49) (0.39)
------ ------- ------ ------ ------
Net Asset Value, End of Period...... $ 8.24 $ 8.18 $ 8.61 $ 8.31 $ 8.20
====== ======= ====== ====== ======
Total Return/2/..................... 6.05% 1.87% 9.27% 7.42% 7.54%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)........................ $87.16 $107.49 $88.25 $52.26 $25.88
Ratio of Net Operating Expenses to
Average Net Assets............... 0.78% 0.87% 0.89% 0.88% 0.86%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............ 0.80% 0.87% 0.89% 0.88% 0.86%/3/
Ratio of Net Income to Average Net
Assets........................... 4.06% 3.55% 3.94% 4.82% 5.72%/3/
Portfolio Turnover Rate........... 563.0% 326.0% 339.0% 106.0% 105.0%/3/
</TABLE>
-------
NOTES
1. Inception date of the Fund was May 31, 1990.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Investment Adviser will use its best efforts to achieve the Fund's invest-
ment objective although its achievement cannot be assured. The Fund's invest-
ment objective and, except as indicated otherwise, the policies described below
may be changed by Master Tax-Exempt Fund's Board of Directors without a vote of
the Fund's shareholders. Certain investment limitations which cannot be changed
without the requisite vote of the shareholders are set forth below under "In-
vestment Limitations."
GENERAL
The Fund is a non-diversified investment portfolio whose investment objective
is to provide New York investors with as high a level of current interest in-
come 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 the preser-
vation of capital and relative stability of principal. To accomplish this goal,
the Fund anticipates that it will invest primarily in New York Municipal Obli-
gations as defined below. Although the Fund has no restrictions as to the mini-
mum or maximum maturity of any individual security that it may hold, it will
have a dollar-weighted average portfolio maturity of 3 to 10 years.
As a matter of fundamental policy, except during temporary defensive periods,
at least 80% of the Fund's net assets will be invested in debt obligations is-
sued by or on behalf of the State of New York and other states, territories and
possessions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political sub-divisions, the in-
terest from which is, in the opinion of bond counsel to the issuer, exempt from
Federal income tax ("Municipal Obligations"). The Fund expects that, except
during temporary defensive periods, under normal market conditions 65% of the
Fund's total assets will be invested in debt securities of the State of New
York, its political sub-divisions, authorities, agencies, instrumentalities and
corporations, and certain other governmental issuers such as Puerto Rico, the
interest from which is, in the opinion of bond counsel to the issuer, exempt
from Federal, New York state and New York City income taxes ("New York Munici-
pal Obligations"). In general, the Fund anticipates that dividends derived from
interest on Municipal Obligations other than New York Municipal Obligations
will be exempt from regular Federal income tax but may be subject to New York
state and New York City personal income taxes. See "Taxes" below.
Under normal market conditions, up to 20% of the Fund's assets may be held in
cash or invested in taxable obligations described below under "Portfolio In-
struments and Other Investment Information--Eligible Taxable Obligations." When
market conditions are uncertain, the Fund may hold cash reserves and eligible
taxable securities without limitations in order to maintain a temporary defen-
sive position. Uninvested cash reserves will not earn income.
QUALITY OF INVESTMENTS
The Fund invests in Municipal Obligations that are rated at the time of pur-
chase: (1) "A" or higher by Standard & Poor's Ratings Group ("S&P") or by
Moody's Investors Service, Inc. ("Moody's"), in the case of bonds (or, in cer-
tain instances, municipal bonds with lower ratings if they are determined by
the Investment Adviser to be comparable to A-rated issues); (2) "SP-2" or
higher by S&P or "MIG-2" or higher ("VMIG-2" or higher, in the case of variable
rate notes) by Moody's, in the case of notes; and (3) "A-2" or higher by S&P or
"Prime-2" or higher by Moody's, in the case of tax-exempt commercial paper. If
not rated, Municipal Obligations purchased by the Fund will be of comparable
quality to the above ratings as determined by the Investment Adviser under the
supervision of the Board of Directors. A discussion of Moody's and S&P's rating
categories is contained in Appendix A to the Statement of Additional Informa-
tion.
4
<PAGE>
TYPES OF MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations which may be held
by the Fund are "general obligation" securities and "revenue" securities. Gen-
eral obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. Reve-
nue securities are payable only from the revenues derived from a particular fa-
cility or class of facilities or, in some cases, from the proceeds of a special
excise tax or other specific revenue source such as the user of the facility
being financed. Revenue securities may include private activity bonds. Such
bonds may be issued by or on behalf of public authorities to finance various
privately operated facilities, and are not payable from the unrestricted reve-
nues of the issuer. As a result, the credit quality of private activity bonds
is frequently related directly to the credit standing of private corporations
or other entities. Since interest on private activity bonds is treated as a
specific tax preference item under the Federal alternative minimum tax, the
Fund's investments in private activity bonds will not exceed, under normal mar-
ket conditions, 20% of its total assets when added together with cash and any
taxable investments held by the Fund.
The Fund's portfolio may also include, without limitation, "moral obligation"
securities, which are normally issued by special-purpose public authorities. If
the issuer of moral obligation securities is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund, the restora-
tion of which is a moral commitment but not a legal obligation of the state or
municipality which created the issuer.
The Fund may also purchase custodial receipts evidencing the right to receive
either the principal amount or the periodic interest payments or both with re-
spect 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 re-
ceive. 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 Obli-
gation. The Fund intends 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 10% limit described in Investment Limitation No. 3 below.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
VARIABLE AND FLOATING RATE INSTRUMENTS
Municipal Obligations purchased by the Fund 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 Fund based upon
the Investment Adviser's determination that their quality at the time of pur-
chase is comparable to at least the minimum ratings set forth above. In some
cases the 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, guar-
antee or commitment to lend. Although there may be no active secondary market
with respect to a particular variable or floating rate instrument purchased by
the Fund, the Fund may (at any time or during specified intervals within a pre-
scribed 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 the Fund to
dispose of a variable or floating rate instrument in the event the issuer de-
faulted on its payment obligation or during periods when the Fund is
5
<PAGE>
not entitled to exercise its demand rights. In such cases, the Fund could suf-
fer a loss with respect to the instruments.
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
The Fund may purchase Municipal Obligations on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions
involve a commitment by the Fund to purchase or sell particular Municipal Obli-
gations with payment and delivery taking place in the future, beyond the normal
settlement date, at a stated price and yield. Securities purchased on a "for-
ward commitment" or "when-issued" basis are recorded as an asset and are sub-
ject to changes in value based upon changes in the general level of interest
rates. The Fund expects that its forward commitments and "when-issued" pur-
chases will not exceed 25% of the value of its total assets absent unusual mar-
ket conditions, and that the length of such commitments will not exceed 45
days. The Fund does not intend to engage in "when-issued" purchases and forward
commitments for speculative purposes but only in furtherance of its investment
objective.
The Fund may also acquire "stand-by commitments" with respect to Municipal Ob-
ligations held in its portfolio. Under a "stand-by commitment," a dealer agrees
to purchase at the Fund's option specified Municipal Obligations at a stated
price. The Fund will acquire "stand-by commitments" solely to facilitate port-
folio liquidity and does not intend to exercise its rights thereunder for trad-
ing purposes. "Stand-by commitments" acquired by the Fund will be valued at
zero in determining the Fund's net asset value.
ELIGIBLE TAXABLE OBLIGATIONS
Taxable securities that may be held by the Fund within the limits described
above include: (i) municipal bond index and interest rate futures contracts;
(ii) obligations of the U.S. Treasury; (iii) obligations of agencies and in-
strumentalities of the U.S. Government; (iv) money market instruments such as
certificates of deposit and bankers' acceptances; (v) repurchase agreements
collateralized by U.S. Government obligations or other money market instru-
ments; or (vi) securities issued by other investment companies. Municipal bond
index futures contracts, investment company securities and repurchase agree-
ments are described below.
Futures Contracts
The Fund may purchase and sell municipal bond index and interest rate futures
contracts as a hedge against changes in market conditions. A municipal bond in-
dex assigns values daily to the municipal bonds included in the index based on
the independent assessment of dealer-to-dealer municipal bond brokers. A munic-
ipal bond index futures contract represents a firm commitment by which two par-
ties 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 con-
tract is originally struck. No physical delivery of the underlying securities
in the index is made.
The Fund may enter into contracts for the future delivery of fixed-income se-
curities commonly known as interest rate futures contracts. Interest rate
futures contracts are similar to the municipal bond index futures contracts ex-
cept that, instead of a municipal bond index, the "underlying commodity" is
represented by various types of fixed-income securities.
The Fund will not engage in transactions in futures contracts for speculation,
but only as a hedge against changes in market values of securities which the
Fund holds or intends to purchase where the transactions reduce risks inherent
in the management of the Fund. The Fund will engage in futures contracts only
to the extent permitted by the Commodity Futures Trading Commission ("CFTC")
and the Securities and Exchange Commission ("SEC"). When investing in
6
<PAGE>
futures contracts, the Funds must satisfy certain asset segregation require-
ments 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 con-
taining cash and/or certain 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 cash
and/or certain liquid assets in an amount equal to the market value of the se-
curities 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 es-
tablished. Asset segregation requirements are not applicable when the Fund
"covers" a futures position generally by entering into an offsetting position.
As of the date of this Prospectus, the Fund intends to limit its hedging trans-
actions 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 ex-
ceed 5% of the Fund's total assets, after taking into account any unrealized
profits and losses on the Fund's open contracts.
The purchase of futures contracts in connection with securities which the Fund
intends to purchase will require an amount of cash or liquid securities, equal
to the market value of the futures contracts, to be deposited in a segregated
account to collateralize the position and thereby ensure that the use of such
features is unleveraged.
Transactions in futures contracts as a hedging device may subject the Fund to
a number of risks. Successful use of futures contracts by the Fund is subject
to the ability of the Investment Adviser to correctly anticipate movements in
the direction of the market. In addition, there may be an imperfect correla-
tion, or no correlation at all, between movements in the price of the futures
contracts and movements in the price of the securities being hedged. Further,
there is no assurance that a liquid market will exist for any particular
futures contract at any particular time. Consequently, the 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. Any income
from investments in futures contracts will be taxable.
Investment Company Securities
Subject to the limit on investments in taxable obligations described above,
the Fund may invest in securities issued by other investment companies which
invest in high-quality, short-term securities and which determine their net as-
set value per share based on the amortized cost or penny-rounding method. In
addition to the advisory fees and other expenses the Fund bears directly in
connection with its own operations, as a shareholder of another investment com-
pany, the 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 compa-
ny, some or all of which would be duplicative. Such securities will be acquired
by the Fund within the limits prescribed by the Investment Company Act of 1940
(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.
Repurchase Agreements
The Fund may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually agreed upon date and price ("repur-
chase agreements"). The Fund will enter into repurchase agreements only with
financial institutions that are deemed to be creditworthy by the Investment Ad-
viser, pursuant to guidelines established by Master Tax-Exempt Fund's Board of
Directors. The Fund will not enter into repurchase agreements with the Invest-
ment Adviser or any of its affiliates. Repurchase agreements with remaining ma-
turities in excess of seven days will be considered to be illiquid securities
and will be subject to the 10% limit described in Investment Limitation No. 3
below.
7
<PAGE>
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 the Fund at
not less than the repurchase price. Default or bankruptcy of the seller would,
however, expose the 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 agree-
ment. Income on the repurchase agreements will be taxable.
ILLIQUID SECURITIES
The Fund will not knowingly invest more than 10% of the value of its net as-
sets in securities that are illiquid. The Fund may purchase securities which
are not registered under the Securities Act of 1933 (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 de-
termined by the Investment Adviser, acting under guidelines approved and moni-
tored by the Board, that an adequate trading market exists for that security.
This investment practice could have the effect of increasing the level of illi-
quidity in the Fund during any period that qualified institutional buyers be-
come uninterested in purchasing these restricted securities.
PORTFOLIO TURNOVER
The Fund may sell a portfolio investment immediately after its acquisition if
the Investment Adviser believes that such a disposition is consistent with the
Fund's investment objective. The rate of portfolio turnover will not be a lim-
iting factor in making portfolio decisions. A high rate of portfolio turnover
may involve correspondingly greater transaction costs which will ultimately be
borne by the Fund's shareholders and may result in the realization of substan-
tial net capital gains. To the extent that net short-term capital gains are re-
alized, any distributions resulting from such gains are considered ordinary in-
come for Federal income tax purposes. (See "Financial Highlights" and "Taxes--
Federal").
RISK FACTORS
The Fund intends to follow the diversification standards set forth in the 1940
Act except to the extent the Investment Adviser determines that non-diversifi-
cation is appropriate in order to maximize the percentage of the Fund's assets
that are New York Municipal Obligations. The investment return on a non-diver-
sified portfolio typically is dependent upon the performance of a smaller num-
ber of securities relative to the number of securities held in a diversified
portfolio. The Fund's assumption of large positions in the obligations of a
small number of issuers will affect the value of the Fund's portfolio to a
greater extent than that of a diversified portfolio in the event of changes in
the financial condition or in the market's assessment of the issuers.
Although the Fund does not presently intend to do so on a regular basis, it
may invest more than 25% of its assets in Municipal Obligations the interest on
which is paid solely from revenues on similar projects if such investment is
deemed necessary or appropriate by the Investment Adviser. To the extent that
the Fund's assets are concentrated in Municipal Obligations payable from reve-
nues on similar projects, the Fund will be subject to the particular risks pre-
sented by such projects to a greater extent than it would be if its assets were
not so concentrated.
The Fund's ability to achieve its investment objective is dependent upon the
ability of the issuers of New York Municipal Obligations to meet their continu-
ing 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 Obligations to
meet their financial obligations.
8
<PAGE>
Certain substantial issuers of New York Municipal Obligations (including is-
suers whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times jeop-
ardized 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. In recent
years, several different issues of municipal securities of New York State and
its agencies and instrumentalities and of New York City have been downgraded by
S&P and Moody's. On the other hand, strong demand for New York Municipal Obli-
gations has at times had the effect of permitting New York Municipal Obliga-
tions to be issued with yields relatively lower, and after issuance, to trade
in the market at prices relatively higher, than comparably rated municipal ob-
ligations issued by other jurisdictions. A recurrence of the financial diffi-
culties previously experienced by certain issuers of New York Municipal Obliga-
tions could result in defaults or declines in the market values of those is-
suers' existing obligations and, possibly, in the obligations of other issuers
of New York Municipal Obligations. Although as of the date of this Prospectus,
no issuers of New York Municipal Obligations 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 Mu-
nicipal Obligations and, consequently, the net asset value of the Fund's port-
folio.
Other considerations affecting the Fund's investments in New York Municipal
Obligations are summarized in the Statement of Additional Information.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest thereon from Federal income tax (and, with respect to New York
Municipal Obligations, to the exemption of interest thereon from New York state
and New York City personal income taxes) are rendered by bond counsel to the
respective issuers at the time of issuance. Neither the Fund nor its Investment
Adviser will review the proceedings relating to the issuance of Municipal Obli-
gations or the basis for such opinions.
INVESTMENT LIMITATIONS
The Fund's following investment limitations may not be changed without the
vote of a majority of the Fund's outstanding Shares (as defined under
"Miscellaneous").
The Fund may not:
1. Purchase securities of any one issuer if, as a result, more than 5% of
the value of the Fund's total assets would be invested in the securities of
such issuer, except that (a) up to 50% of the value of the Fund's assets may
be invested without regard to this 5% limitation, provided that no more than
25% of the value of the Fund's total assets are invested in the securities of
any one issuer; and (b) the foregoing 5% limitation does not apply to securi-
ties issued or guaranteed by the U.S. Government, its agencies or instrumen-
talities;
2. 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 con-
nection 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 the Fund may enter into futures con-
tracts 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.) The Fund may not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding;
3. Knowingly invest more than 10% of the value of its total assets in illiq-
uid securities, including repurchase agreements with remaining maturities in
9
<PAGE>
excess of seven days and other securities which are not readily marketable;
and
4. 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 and 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 po-
litical sub-divisions.
* * *
For purposes of Investment Limitation No. 1 above: (a) a security is consid-
ered to be issued by the governmental entity or entities whose assets and reve-
nues 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 guaran-
tee; 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 obliga-
tions.
The Fund will not knowingly invest more than 10% of the value of its net as-
sets in illiquid securities, including repurchase agreements with remaining ma-
turities in excess of seven days and other securities which are not readily
marketable.
If a percentage limitation is satisfied at the time of investment, a later in-
crease or decrease in such percentage resulting from a change in value of the
Fund's portfolio securities will not constitute a violation of such limitation.
PRICING OF SHARES
The net asset value of the Fund's Shares is determined and priced for pur-
chases and redemptions at the close of regular trading hours on the New York
Stock Exchange (the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset
value and pricing for the Fund's Shares are determined on each day the Exchange
and the Investment Adviser are open for business ("Business Day"). Currently,
the holidays which the Fund observes are: 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. Net asset
value per share for purposes of pricing sales and redemptions is calculated by
dividing the value of all securities and other assets allocable to the Fund,
less the liabilities charged to the Fund, by the number of outstanding Shares.
Portfolio securities in the Fund for which market quotations are readily
available (other than debt securities maturing in 60 days or less) are valued
at market value. Securities and other assets for which market quotations are
not readily available are valued at fair value, pursuant to guidelines adopted
by Master Tax-Exempt Fund's Board of Directors. Absent unusual circumstances,
portfolio securities maturing in 60 days or less are normally valued at amor-
tized cost. 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. The net
asset value of the Fund will fluctuate as the market value of the Fund's port-
folio securities changes in response to changing market rates of interest and
other factors.
The Fund's Administrators have undertaken to price the securities in the
Fund's portfolio and may use one or more pricing services to value certain
portfolio securities 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 Master Tax-Exempt Fund's Board of Directors.
10
<PAGE>
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares are continuously offered for sale by Master Tax-Exempt Fund's sponsor
and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-owned
subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
PURCHASE OF SHARES
The Distributor has established several procedures for purchasing Shares in
order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by in-
stitutions ("Institutional Investors" and, collectively with Direct Investors,
"Investors"). Shares may also be purchased by customers ("Customers") of the
Investment Adviser, its affiliates and correspondent banks, and other institu-
tions ("Shareholder Organizations") that have entered into shareholder servic-
ing agreements with Master Tax-Exempt Fund. A Shareholder Organization may
elect to hold of record Shares for its Customers and to record beneficial own-
ership 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 orders for its Customers and to transmit, on a
timely basis, payment for such orders to Mutual Funds Service Company ("MFSC"),
the Fund's 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 MFSC to the particular
Shareholder Organization. As an alternative, a Shareholder Organization may
elect to establish its Customers' accounts of record with MFSC. In this event,
even if the Shareholder Organization continues to place its Customers' purchase
and redemption orders with the Fund, MFSC will send confirmations of such
transactions and periodic account statements directly to Customers. A Share-
holder Organization may also elect to establish its Customers as record hold-
ers.
Master Tax-Exempt Fund enters into shareholder servicing agreements with
Shareholder Organizations which agree to provide their Customers various share-
holder administrative services with respect to their Shares (hereinafter re-
ferred to as "Service Organizations"). Shares in the Fund bear the expense of
fees payable to Service Organizations for such services. See "Management of the
Fund--Service Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly in accordance with procedures described below un-
der "Purchase Procedures."
PUBLIC OFFERING PRICE
The public offering price for the Shares is the sum of the net asset value of
the Shares purchased plus a sales load according to the table below:
<TABLE>
<CAPTION>
REALLOWANCE
TOTAL SALES CHARGES TO DEALERS
------------------------------ --------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE VALUE PER SHARE PER SHARE
--------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000................. 4.50% 4.71% 4.00%
$50,000 to $99,999................ 4.00 4.17 3.50
$100,000 to $249,999.............. 3.50 3.63 3.00
$250,000 to $499,999.............. 3.00 3.09 2.50
$500,000 to $999,999.............. 2.00 2.05 1.50
$1,000,000 to $1,999,999.......... 1.00 1.00 .50
$2,000,000 and over............... .50 .50 .25
</TABLE>
11
<PAGE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
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 reallow to any dealer that sponsors sales con-
tests or recognition programs conforming to criteria established by the Dis-
tributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the dealer at the public offering price during such programs. Also, the Dis-
tributor in its discretion may from time to time, pursuant to objective crite-
ria 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 Fund. If any such program is made available to any dealer, it
will be made available to all dealers on the same terms and conditions. Pay-
ments made under such programs will be made by the Distributor out of its own
assets and not out of the assets of the Fund. These programs will not change
the price of Shares or the amount that the Fund will receive from such sales.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations and
partnerships (excluding full service broker/dealers and financial planners,
registered investment advisers and depository institutions not covered by the
exemptions in (d) and (e) below); (d) financial planners and registered invest-
ment advisers not affiliated with or clearing purchases through full service
broker/dealers; (e) purchases of Shares by depository institutions for their
own account as principal; (f) exchange transactions (described below under "In-
vestor Programs--Exchange Privilege") where the Shares being exchanged were ac-
quired in connection with the distribution of assets held in a trust, agency or
custodial account maintained with the trust department of a bank; (g)
corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh
accounts) sponsored by the Distributor and IRA accounts sponsored by the In-
vestment Adviser; (h) company-sponsored employee pension or retirement plans
making direct investments in the Fund; (i) purchases of Shares by officers,
trustees, directors, employees and retirees of Master Tax-Exempt Fund, UST Mas-
ter Funds, Inc. ("Master Fund"), the Investment Adviser, the Distributor or of
any direct or indirect affiliate of any of them; (j) purchases of Shares by all
beneficial shareholders of Master Tax-Exempt Fund or Master Fund as of May 22,
1989; (k) purchases of Shares by investment advisers registered under the In-
vestment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Tax-Exempt Fund and Master
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investments Limited Partnership; and (n) customers of
certain financial institutions who purchase Shares through a registered repre-
sentative of UST Financial Services Corp. on the premises of their financial
institutions. In addition, no sales load is charged on the reinvestment of div-
idends or distributions or in connection with certain share exchange transac-
tions. Investors who have previously redeemed shares in an "Eligible Fund" (as
defined below) on which a sales load has been paid also have a one-time privi-
lege of purchasing shares of another "Eligible Fund" at net asset value without
a sales charge, provided that such privilege will apply only to purchases made
within 30 calendar days from the date of redemption and only with respect to
the amount of the redemption. These exemptions to the imposition of a sales
load are due to the nature of the investors and/or reduced sales effort that
will be needed in obtaining investments.
12
<PAGE>
Quantity Discounts
An investor in the Fund may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify MFSC at
the time of purchase that he or she would like to take advantage of any of the
discount plans described below. Upon such notification, the investor will re-
ceive the lowest applicable sales charge. Quantity discounts may be modified or
terminated at any time and are subject to confirmation of an investor's hold-
ings through a check of appropriate records. For more information about quan-
tity discounts, please call (800) 446-1012 or contact your Shareholder Organi-
zation.
Rights of Accumulation. A reduced sales load applies to any purchase of shares
of any portfolio of Master Tax-Exempt Fund and Master Fund that is sold with a
sales load ("Eligible Fund") where an investor's then current aggregate invest-
ment is $50,000 or more. "Aggregate investment" means the total of: (a) the
dollar amount of the then current purchase of shares of an Eligible Fund, and
(b) the value (based on current net asset value) of previously purchased and
beneficially owned shares of any Eligible Fund on which a sales load has been
paid. If, for example, an investor beneficially owns shares of one or more Eli-
gible Funds with an aggregate current value of $49,000 on which a sales load
has been paid and subsequently purchases shares of an Eligible Fund having cur-
rent value of $1,000, the load applicable to the subsequent purchase would be
reduced to 4.00% of the offering price. Similarly, with respect to each subse-
quent investment, all shares of Eligible Funds that are beneficially owned by
the investor at the time of investment may be combined to determine the appli-
cable sales load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below and
in the Letter of Intent. To compute the applicable sales load, the offering
price of shares of an Eligible Fund on which a sales load has been paid, bene-
ficially owned by an investor on the date of submission of the Letter of In-
tent, may be used as a credit toward completion of the Letter of Intent. Howev-
er, the reduced sales load will be applied only to new purchases.
MFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load re-
duction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the total purchases. If such re-
mittance is not received within 20 days, MFSC, as attorney-in-fact pursuant to
the terms of the Letter of Intent and at the Distributor's direction, will re-
deem an appropriate number of shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind an investor to purchase the full
amount indicated at the sales load in effect at the time of signing, but an in-
vestor must complete the intended purchase in accordance with the terms of the
Letter of Intent to obtain the reduced sales load. To apply, an investor must
indicate his or her intention to do so under a Letter of Intent at the time of
purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse purchas-
ing securities for his, her or their own account or for the account of any mi-
nor
13
<PAGE>
children, or the aggregate investments of a trustee or custodian of any quali-
fied pension or profit sharing plan or IRA established (or the aggregate in-
vestment of a trustee or other fiduciary) for the benefit of the persons listed
above.
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompanying this Prospectus and mailing it, together with a
check payable to UST Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in the Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from MFSC;
or (c) a letter stating the amount of the investment and the account number in
which the investment is to be made. Institutional Investors may purchase Shares
by transmitting their purchase orders to MFSC by telephone at (800) 446-1012 or
by terminal access. Institutional Investors must pay for Shares with Federal
funds or funds immediately available to MFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to MFSC. Prior to
making an initial investment by wire, an Investor must telephone MFSC at (800)
446-1012 (from overseas, call (617) 557-8280) for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve Sys-
tem to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
UST Master Funds
Wire Control Number
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Appli-
cation accompanying this Prospectus and forward it to MFSC. Redemptions by In-
vestors will not be processed until the completed Application for purchase of
Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500. The minimum subsequent in-
vestment for both types of investors is $50. Customers may agree with a partic-
ular Shareholder Organization to make a minimum purchase with respect to their
accounts. Depending upon the terms of the particular account, Shareholder Orga-
nizations may charge a Customer's account fees for automatic investment and
other cash management services provided. Master Tax-Exempt Fund reserves the
right to reject any purchase order, in whole or in part, or to waive any mini-
mum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Fund in accordance with procedures gov-
erning their accounts at the Shareholder Organizations. It is the responsibil-
ity of the Shareholder Organizations to transmit redemption orders to MFSC
14
<PAGE>
and credit such Customer accounts with the redemption proceeds on a timely ba-
sis. Redemption orders for Institutional Investors must be transmitted to MFSC
by telephone at (800) 446-1012 or by terminal access. No charge for wiring re-
demption payments to Shareholder Organizations or Institutional Investors is
imposed by Master Tax-Exempt Fund, although Shareholder Organizations may
charge a Customer's account for wiring redemption proceeds. Information relat-
ing 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 regis-
tered investment adviser or certified financial planner for further information
on transaction fees. Investors may redeem all or part of their Shares in accor-
dance with any of the procedures described below (these procedures also apply
to Customers of Shareholder Organizations for whom individual accounts have
been established with MFSC).
REDEMPTION BY MAIL
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. 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 MFSC 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 secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing MFSC by
wire or telephone to wire the redemption proceeds directly to the Direct In-
vestor's account at any commercial bank in the United States. Direct Investors
who are shareholders of record may redeem Shares by instructing MFSC by tele-
phone to mail a check for redemption proceeds of $500 or more to the share-
holder of record at his or her address of record. Institutional Investors may
also redeem Shares by instructing MFSC by telephone at (800) 446-1012 or by
terminal access. Only redemptions of $500 or more
15
<PAGE>
will be wired to a Direct Investor's account. An $8.00 fee for each wire re-
demption by a Direct Investor is deducted by MFSC from the proceeds of the re-
demption. The redemption proceeds for Direct Investors must be paid to the same
bank and account as designated on the Application or in written instructions
subsequently received by MFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, a Direct Investor must send a written request to Master Tax-Exempt
Fund, c/o MFSC, at the address listed above under "Redemption by Mail." Such
requests must be signed by the Direct Investor, with signature guaranteed (see
"Redemption by Mail" above, for details regarding signature guarantees). Fur-
ther documentation may be requested.
MFSC and the Distributor reserve the right to refuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Master Tax-
Exempt Fund, MFSC or the Distributor. MASTER TAX-EXEMPT FUND, MFSC AND THE DIS-
TRIBUTOR WILL NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING
UPON TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN AT-
TEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER TAX-EXEMPT
FUND WILL USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING
THOSE INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Master Tax-Exempt Fund and MFSC reserve the right not to honor
the redemption until MFSC is reasonably satisfied that the check has been col-
lected in accordance with the applicable banking regulations which may take up
to 15 days. A Direct Investor who anticipates the need for more immediate ac-
cess to his or her investment should purchase Shares by Federal funds or bank
wire or by certified or cashier's check. Banks normally impose a charge in con-
nection with the use of bank wires, as well as certified checks, cashier's
checks and Federal funds. If a Direct Investor's purchase check is not collect-
ed, the purchase will be cancelled and MFSC will charge a fee of $25.00 to the
Direct Investor's account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If an investor is unable to contact MFSC by tele-
phone, the Investor may also deliver the redemption request to MFSC in writing
at the address noted above under "How to Purchase and Redeem Shares--Redemption
by Mail."
Other Redemption Information
Except as described in "Investor Programs" below, Investors may be required to
redeem Shares 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 the 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 min-
imum balance.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day. Purchase orders received and accepted after the
close of regular trading hours on the Exchange are priced at the net asset
value per Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and
16
<PAGE>
without an exchange fee imposed by Master Tax-Exempt Fund, exchange Shares of
the Fund having a value of at least $500 for Service Shares of any other port-
folio offered by Master Tax-Exempt Fund or Master Fund, provided that such
other shares may legally be sold in the state of the investor's residence.
UST Master Tax-Exempt Funds, Inc. currently offers, in addition to the Fund,
four other portfolios:
Short-Term Tax-Exempt Fund, a diversified tax-exempt money market fund seek-
ing a moderate level of current interest income exempt from Federal income
taxes through investing primarily in high-quality municipal obligations ma-
turing within 13 months;
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through in-
vestments in municipal obligations and having a dollar-weighted average port-
folio maturity of 1 to 3 years;
Intermediate-Term Tax-Exempt Fund, a diversified fund seeking a high level
of current income exempt from Federal income taxes through investments in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of three to ten years; and
Long-Term Tax-Exempt Fund, a diversified fund attempting to maximize over
time current income exempt from Federal income taxes, investing in municipal
obligations and having a dollar-weighted average portfolio maturity of 10 to
30 years.
UST Master Funds, Inc. currently offers twenty investment portfolios:
Money Fund, a money market fund seeking as high a level of current income as
is consistent with liquidity and stability of principal through investments
in high-quality money market instruments maturing within 13 months;
Government Money Fund, a money market fund seeking as high a level of cur-
rent income as is consistent with liquidity and stability of principal
through investments in obligations issued or guaranteed by the U.S. Govern-
ment, its agencies and instrumentalities and repurchase agreements collater-
alized by such obligations;
Treasury Money Fund, a money market fund seeking current income generally
exempt from state and local income taxes through investments in direct short-
term obligations issued by the U.S. Treasury and certain agencies or instru-
mentalities of the U.S. Government;
Short-Term Government Securities Fund, a fund seeking a high level of cur-
rent income by investing principally in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations, and having a dollar-weighted aver-
age portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of cur-
rent interest income by investing principally in investment grade or better
debt obligations and money market instruments, and having a dollar-weighted
average portfolio maturity of 3 to 10 years;
Managed Income Fund, a fund seeking higher current income through invest-
ments in investment grade debt obligations, U.S. Government obligations and
money market instruments;
Equity Fund, a fund seeking primarily long-term capital appreciation through
investments in a diversified portfolio of primarily equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefiting from the availability, development
and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or
17
<PAGE>
companies that are most effective at obtaining and applying productivity en-
hancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based companies benefitting from their position as effec-
tive and strong competitors on a global basis;
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations;
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments in all coun-
tries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
An exchange involves a redemption of all or a portion of the Shares and the
investment of the redemption proceeds in shares of another portfolio of Master
Tax-Exempt Fund or Master Fund. 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. The Service Shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares (plus any applicable
sales load) next determined after acceptance of the exchange request. No sales
load will be payable on shares to be acquired through an exchange to the extent
that a sales load was previously paid on the Shares being exchanged.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in the Fund. For fur-
ther information regarding exchange privileges, shareholders should call (800)
446-1012 (from overseas, call (617) 557-8280). Investors exercising the ex-
change privilege with the other portfolios of Master Tax-Exempt Fund or Master
Fund should request and review the prospectuses of those portfolios prior to
making an exchange. Such prospectuses may be obtained by calling the telephone
numbers listed above. Master Tax-Exempt Fund may modify or terminate the ex-
change program at any time upon 60 days' written notice to shareholders, and
may reject any exchange request. In order to prevent abuse of this privilege to
the disadvantage of other shareholders, Master Fund and Master Tax-Exempt Fund
reserve the right to limit the number of exchange requests of Investors and
Customers of Shareholder Organizations to no more than six per year. MASTER
TAX-EXEMPT FUND, MFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE FOR
18
<PAGE>
THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REASONABLY
BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS
ARE GENUINE, MASTER TAX-EXEMPT FUND WILL USE SUCH PROCEDURES AS ARE CONSIDERED
REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMATION
AS TO ACCOUNT REGISTRATION.
For Federal income tax purposes, an exchange of Shares is a taxable event and,
accordingly, a capital gain or loss may be realized by an investor. Before mak-
ing an exchange, an investor should consult a tax or other financial adviser to
determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of the Fund with a value of $10,000 or more may
establish a Systematic Withdrawal Plan. The Investor may request a declining-
balance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Applica-
tion contained in this Prospectus and mail it to MFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling (800) 446-1012 (from overseas, call (617) 557-8280).
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (minimum
of $50 per transaction) at regular intervals selected by the Investor. The min-
imum initial investment for an Automatic Investment Program account is $50.
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 op-
tion, 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 in-
tervals. This may help Investors to reduce their average cost per share because
the agreed upon fixed investment amount allows more Shares to be purchased dur-
ing periods of lower share prices and fewer Shares during periods of higher
prices. In order to be effective, Dollar Cost Averaging should usually be fol-
lowed 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.
To establish an Automatic Investment account permitting Investors to use the
Dollar Cost Averaging investment method described above, an Investor must com-
plete the Supplemental Application contained in this Prospectus and mail it to
MFSC. An Investor may cancel his participation in this Program or change the
amount of purchase at any time by mailing written notification to MFSC, P.O.
Box 2798, Boston, MA 02208-2798 and notification will be effective three Busi-
ness Days following receipt. Master Tax-Exempt Fund may modify or terminate
this privilege at any time or charge a service fee, although no such fee cur-
rently is contemplated. An Investor may also implement the Dollar Cost Averag-
ing method on his own initiative or through other entities.
19
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund's net income for dividend purposes consists of (i) all accrued in-
come, whether taxable or tax-exempt, plus discount earned on the Fund's assets,
less (ii) amortization of premium on such assets, accrued expenses directly at-
tributable to the Fund, and the general expenses or the expenses common to more
than one Fund (e.g., legal, administrative, accounting, and Directors' fees) of
Master Tax-Exempt Fund, prorated to the Fund on the basis of its relative net
assets.
The net investment income of the Fund is declared daily as a dividend to the
persons who are shareholders of the Fund at the opening of business on the day
of declaration. All such dividends are paid within ten days after the end of
each month or within seven days after the redemption of all of a shareholder's
Shares. Net realized capital gains are distributed at least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of Shareholder Organizations
will receive dividends and distributions in additional Shares (as determined on
the payable date), unless they have requested in writing (received by MFSC at
Master Tax-Exempt Fund's address prior to the payment date) to receive divi-
dends and distributions in cash. Reinvested dividends and distributions receive
the same tax treatment as those paid in cash.
TAXES
FEDERAL
The Fund has qualified and intends to continue to qualify as a "regulated in-
vestment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification generally relieves the Fund of liability for Fed-
eral income taxes to the extent that the Fund's earnings are distributed in ac-
cordance with the Code.
The Fund's policy is to pay its shareholders dividends each year equal to at
least the sum of 90% of its exempt-interest income (net of certain deductions)
and 90% of its investment company taxable income, if any. Some dividends de-
rived from exempt-interest income ("exempt-interest dividends") may be treated
by the Fund's shareholders as items of interest excludable from their gross in-
come under Section 103(a) of the Code, unless under the circumstances applica-
ble to the particular shareholder, exclusion would be disallowed. (See State-
ment of Additional Information--"Additional Information Concerning Taxes.")
If the Fund should hold certain private activity bonds issued after August 7,
1986, shareholders must include, as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
their Federal alternative minimum taxable income for purposes of determining
liability (if any) for the 26% to 28% alternative minimum tax applicable to in-
dividuals and the 20% alternative minimum tax and the environmental tax appli-
cable to corporations. Corporate shareholders must also take all exempt-inter-
est dividends into account in determining certain adjustments under the Federal
alternative minimum tax. The environmental tax applicable to corporations is
imposed at the rate of .12% on the excess of the corporation's modified Federal
alternative minimum taxable income over $2 million. Shareholders receiving So-
cial Security benefits should note that all exempt-interest dividends will be
taken into account in determining the taxability of such benefits.
Dividends payable by the Fund which are derived from taxable income or from
long-term or short-term capital gains will be subject to Federal income tax,
whether such dividends are paid in the form of cash or additional Shares. An
investor considering buying Shares of the Fund on or just before the record
date
20
<PAGE>
of a dividend should be aware that the amount of the forthcoming dividend pay-
ment, although in effect a return of capital, will be taxable to them.
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 the Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. Generally, a shareholder may include sales charges in-
curred upon the purchase of Shares in his 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 such Shares for
shares of another portfolio within 90 days of the purchase and is able to re-
duce the sales charges applicable to the new shares (by virtue of the exchange
privilege), the amount equal to reduction may not be included in the tax basis
of the shareholder's exchanged Shares, but may be included (subject to the lim-
itation) in the tax basis of the new shares.
NEW YORK
Exempt-interest dividends (as defined for Federal income tax purposes) derived
from interest on New York Municipal Obligations (as defined above) will be ex-
empt from New York state and New York City personal income taxes (but not cor-
porate franchise taxes), provided the interest on such obligations is and con-
tinues to be exempt from applicable Federal, New York state and New York City
income taxes. To the extent that investors are subject to state and local taxes
outside of New York State and New York City, distributions by the Fund may be
taxable income for purposes thereof. Dividends and distributions derived from
income (including capital gains on all New York Municipal Obligations) other
than interest on the New York Municipal Obligations described above are not ex-
empt from New York State and New York City taxes. A percentage of the interest
on indebtedness incurred or continued by a shareholder to purchase or carry
Shares of the Fund is not deductible for Federal, New York state or New York
City personal income tax purposes.
MISCELLANEOUS
The foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute for
careful tax planning. Accordingly, potential investors in the Fund should con-
sult their tax advisers with specific reference to their own tax situations.
Shareholders will be advised at least annually as to the Federal, New York
state and New York City personal income tax consequences of distributions made
each year.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of Master
Tax-Exempt Fund's Board of Directors. The Statement of Additional Information
contains the names of and general background information concerning Master Tax-
Exempt Fund's directors.
INVESTMENT ADVISER
United States Trust Company of New York serves as the Investment Adviser to
the Fund. The Investment Adviser (and its predecessor) is a state-chartered
bank and trust company created by Special Act of the New York Legislature in
1853. The Investment Adviser provides trust and banking services to individu-
als, corporations, and institutions both nationally
21
<PAGE>
and internationally, including investment management, estate and trust adminis-
tration, financial planning, corporate trust and agency banking, and personal
and corporate banking. The Investment Adviser is a member bank of the Federal
Reserve System and the Federal Deposit Insurance Corporation and is one of the
twelve members of the New York Clearing House Association.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
The Investment Adviser manages the Fund, makes decisions with respect to and
places orders for all purchases and sales of the Fund's portfolio securities,
and maintains records relating to such purchases and sales. The Fund's portfo-
lio manager, Kenneth J. McAlley, is the person primarily responsible for the
day-to-day management of the Fund's investment portfolio. Mr. McAlley, Execu-
tive Vice President and Manager of the Fixed Income Investment Division of U.S.
Trust, has been with U.S. Trust since 1980 and has been the Fund's portfolio
manager since 1995.
For the services provided and expenses assumed pursuant to the Investment Ad-
visory Agreement, the Investment Adviser is entitled to be paid a fee, computed
daily and paid monthly, at the annual rate of .50% of the average daily net as-
sets of the Fund. For the fiscal year ended March 31, 1995, the Investment Ad-
viser received an advisory fee at the effective annual rate of .48% of the
Fund's average daily net assets. For the same period, the Investment Adviser
waived advisory fees at the effective annual rate of .02% of the Fund's average
daily net assets.
From time to time, the Investment Adviser may waive (either voluntarily or
pursuant to applicable statutory expense limitations) all or a portion of the
advisory fees payable to it by the Fund, which waivers may be terminated at any
time. See "Management of the Fund--Service Organizations" for additional infor-
mation on fee waivers.
ADMINISTRATORS
MFSC, an affiliate of the Investment Adviser, and Federated Administrative
Services jointly serve as the Fund's administrators (the "Administrators") and
provide it with general administrative and operational assistance. The Adminis-
trators also serve as administrators to the other portfolios of Master Tax-Ex-
empt Fund and Master Fund. For the services provided to all portfolios of Mas-
ter Tax-Exempt Fund and Master Fund (except the International, Emerging Ameri-
cas, Pacific/Asia and Pan European Funds), the Administrators are entitled
jointly to annual fees, computed daily and paid monthly, based on the combined
aggregate average daily net assets of the two companies (excluding the Interna-
tional, Emerging Americas, Pacific/Asia and Pan European Funds) as follows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF MASTER FUND
(EXCLUDING THE INTERNATIONAL,
EMERGING AMERICAS, PACIFIC/ASIA AND
PAN EUROPEAN FUNDS) AND
MASTER TAX-EXEMPT FUND ANNUAL FEE
----------------------------------- ----------
<S> <C>
first $200 million................................................... .200%
next $200 million.................................................... .175%
over $400 million.................................................... .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of Master
Tax-Exempt Fund and Master Fund are determined in proportion to the relative
average daily net assets of the respective funds at the time of determination.
From time to time, the Administrators may waive (either voluntarily or pursuant
to applicable statutory expense limitations) all or a portion of the adminis-
tration fee payable to them by the Fund, which waivers may be terminated at any
time. See "Management of the Fund--Service Organizations" for additional infor-
mation on fee waivers. For the fiscal year ended March 31, 1995, MFSC and Con-
cord Holding Corpo-
22
<PAGE>
ration, the former co-administrators received an aggregate administration fee
(under the same compensation arrangements noted above) at the effective annual
rate of .154% of the Fund's average daily net assets.
SERVICE ORGANIZATIONS
Master Tax-Exempt Fund will enter into an agreement ("Servicing Agreement")
with each Service Organization requiring it to provide administrative support
services to its Customers beneficially owning Shares. As a consideration for
the administrative services provided to Customers, the Fund will pay the Serv-
ice Organization an administrative service fee at the annual rate of up to .40%
of the average daily net asset value of the Fund's Shares held by the Service
Organization's Customers. Such services, which are described more fully in the
Statement of Additional Information under "Management of the Fund--Service Or-
ganizations," may include assisting in processing purchase, exchange and re-
demption requests; transmitting and receiving funds in connection with Customer
orders to purchase, exchange or redeem Shares; and providing periodic state-
ments. Under the terms of the Servicing Agreement, Service Organizations will
be required to provide to Customers a schedule of any fees that they may charge
in connection with a Customer's investments. Until further notice, the Invest-
ment Adviser and Administrators have voluntarily agreed to waive fees payable
by the Fund in an amount equal to administrative service fees payable by the
Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distribut-
ing securities such as Shares of the Fund, but such banking laws and regula-
tions do not prohibit such a holding company or affiliate or banks generally
from acting as investment adviser, transfer agent, or custodian to such an in-
vestment company, or from purchasing shares of such company for and upon the
order of customers. The Investment Adviser, MFSC and certain Shareholder Orga-
nizations may be subject to such banking laws and regulations. State securities
laws may differ from the interpretations of Federal law discussed in this para-
graph and banks and financial institutions may be required to register as deal-
ers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Fund's method of operations would af-
fect its net asset value per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
UST Master Tax-Exempt Funds, Inc. ("Master Tax-Exempt Fund") was organized as
a Maryland corporation on August 8, 1984. Currently, UST Master Tax-Exempt
Funds, Inc. has authorized capital of 14 billion shares of Common Stock, $.001
par value per share, classified into 5 classes of shares representing 5 invest-
ment portfolios currently being offered. Master Tax-Exempt Fund's Charter au-
thorizes the Board of Directors to classify or reclassify any class of shares
of Master Tax-Exempt Fund into one or more classes or series. Shares of Class D
represent interests in the New York Intermediate-Term Tax-Exempt Fund.
Each Share represents an equal proportionate interest in the Fund and is enti-
tled to such dividends and distributions out of the income earned on the
23
<PAGE>
assets belonging to the Fund as are declared in the discretion of Master Tax-
Exempt Fund's Board of Directors.
Shareholders 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 expressly required by law.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Fund as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Fund's
assets and as its transfer and dividend disbursing agent. Communications to the
custodian and transfer agent should be directed to United States Trust Company
of New York, Mutual Funds Service Division, 770 Broadway, New York, New York
10003-9598.
U.S. Trust has entered into a sub-transfer agency arrangement with MFSC, 73
Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC pro-
vides certain transfer agent, dividend disbursement and registrar services to
the Fund.
EXPENSES
Except as noted below, the Investment Adviser and the Administrators will bear
all expenses in connection with the performance of their advisory and adminis-
trative services. The Fund will bear the expenses incurred in its operations.
Such expenses include taxes; interest; fees, including the Fund's portion of
the fees paid to Master Tax-Exempt Fund's directors and officers who are not
affiliated with the Distributor or the Administrators; SEC fees; state securi-
ties qualification fees; costs of preparing and printing prospectuses for regu-
latory purposes and for distribution to shareholders; advisory and administra-
tion 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 Fund also pays for any brokerage fees and commis-
sions in connection with the purchase of portfolio securities.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance and yields of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indexes
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the per-
formance of mutual funds.
Performance and yield data as reported in national financial publications, in-
cluding 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 na-
ture, may also be used in comparing the performance and yields of the Fund.
The Fund may advertise its effective yield which is calculated by dividing its
average daily net investment income per Share during a 30-day (or one month)
base period identified in the advertisement by its maximum offering price per
Share on the last day of the period, and annualizing the result on a semi-an-
nual basis.
24
<PAGE>
In addition, the Fund may from time to time advertise its "tax-equivalent
yield" to demonstrate the level of taxable yield necessary to produce an after-
tax yield equivalent to that achieved by the Fund. This yield is computed by
increasing the yield of the Fund's Shares (calculated as above) by the amount
necessary to reflect the payment of Federal, New York state and New York City
income taxes at stated tax rates.
From time to time, the Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure re-
flects the average percentage change in the value of an investment in the Fund
from the beginning date of the measuring period to the end of the measuring pe-
riod. 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 commence-
ment of the Fund's operations, or on a year-by-year basis). The Fund may also
use aggregate total return figures for various periods, representing the cumu-
lative change in the value of an investment in the Fund for the specific peri-
od. Both methods of calculating total return assume that dividends and capital
gain distributions made by a Fund during the period are reinvested in Fund
Shares and also reflect the maximum sales load charged by the Fund.
Performance and yields will fluctuate and any quotation of performance and
yield should not be considered as representative of the Fund's future perfor-
mance. Since yields fluctuate, yield data cannot necessarily be used to compare
an investment in the Fund with bank deposits, savings accounts and similar in-
vestment 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 Cus-
tomers that have invested in Shares will not be included in calculations of
yield and performance.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Fund's
investment operations and annual financial statements audited by the Fund's in-
dependent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Master Tax-Exempt Fund or the Fund means, with respect to
the approval of an investment advisory agreement, a distribution plan or a
change in a fundamental investment policy, the affirmative vote of the lesser
of (a) more than 50% of the outstanding shares of Master Tax-Exempt Fund or the
Fund, or (b) 67% or more of the shares of Master Tax-Exempt Fund or the Fund
present at a meeting if more than 50% of the outstanding shares of Master Tax-
Exempt Fund or the Fund are represented at the meeting in person or by proxy.
Inquiries regarding the Fund may be directed to the Distributor at the address
or telephone number listed under "Distributor."
25
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
FOR OVERNIGHT DELIVERY: send to:
UST Master Funds
c/o Mutual Funds Service Company--Transfer Agent
73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus enti-
tled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500;
subsequent investments must be in the minimum amount of $50. Investments may be
made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organiza-
tions, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
26
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES
APPEARS HERE] P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other ______________
Note: Joint tenant registration will be as "joint tenants
with right of survivorship" unless otherwise specified. Trust
registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
Registration for Uniform Gifts/Transfers to Minors should be
in the name of one custodian and one minor and include the
state under which the custodianship is created (using the
minor's Social Security Number ("SSN")). For IRA accounts a
different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
[_] U.S. Citizen
------------------------------ [_] Other (specify)____________
City/State/Zip
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
Initial Investment
[_] NY Intermediate-Term
Tax-Exempt Fund $ ___________810
Initial Investment
[_] Other _____________________ $ ___________
Total Initial Investment: $ ___________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ ____ has been sent to the Fund
from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $500 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ____________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
RIGHTS OF ACCUMULATION
------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this
section, listing all of your accounts including those in your
spouse's name, joint accounts and accounts held for your
minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge
discount described in the Prospectus and Statement of
Additional Information.
[_] I/We own shares of more than one Fund distributed by
Edgewood Services, Inc. Listed below are the numbers of
each of my/our Shareholder Accounts.
[_] The registration of some of my/our shares differs from that
shown on this application. Listed below are the account
number(s) and full registration(s) in each case.
LIST OF OTHER UST MASTER FUND ACCOUNTS:
______________________ _______________________________________
______________________ _______________________________________
______________________ _______________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
------------------------------------------------------------------
LETTER OF INTENT
------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in
the Prospectus. Although I am not obligated to purchase, and
Master Fund is not obligated to sell, I intend to invest,
over a 13-month period beginning on , 19 , an aggregate
amount in Eligible Funds of Master Fund and Master Tax-Exempt
Fund at least equal to (check appropriate box):
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000 [_] $2,000,000
By signing this application, I hereby authorize MFSC to
redeem an appropriate number of shares held in escrow to pay
any additional sales loads payable in the event that I do not
fulfill the terms of this Letter of Intent.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased. We agree to
notify MFSC of any purchases made under the Letter of Intent
or Rights of Accumulation.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES SUPPLEMENTAL APPLICATION
APPEARS HERE] P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked: All dividends are to be [_] reinvested
[_] paid in cash
All capital gains are to be [_] reinvested
[_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day [_] Monthly on both
the 1st and 15th
days
Amount of each debit (minimum $50 per Fund) $ ________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
----------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our account for
amounts drawn by MFSC, acting as my agent for the purchase of Fund shares.
I/We agree that your rights in respect to each withdrawal shall be the same
as if it were a check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received by you. I/We
agree that you shall incur no liability when honoring debits, except a loss
due to payments drawn against insufficient funds. I/We further agree that
you will incur no liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the cancellation of that
purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ---------------- --------- X ------------------ -----------
Signature Date Signature Date
<PAGE>
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of
January, April, July and October
[_] Other______
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make check payable to: Recipient ________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ___________________
account holder of record or mailed
to address other than address of City, State, Zip Code ____________
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
----
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY........................................................... 2
FINANCIAL HIGHLIGHTS...................................................... 3
INVESTMENT OBJECTIVE AND POLICIES......................................... 4
General.................................................................. 4
Quality of Investments................................................... 4
Types of Municipal Obligations........................................... 5
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION.................... 5
Variable and Floating Rate Instruments................................... 5
When-Issued and Forward Transactions and Stand-By Commitments............ 6
Eligible Taxable Obligations............................................. 6
Illiquid Securities...................................................... 8
Portfolio Turnover....................................................... 8
Risk Factors............................................................. 8
INVESTMENT LIMITATIONS.................................................... 9
PRICING OF SHARES......................................................... 10
HOW TO PURCHASE AND REDEEM SHARES......................................... 11
Distributor.............................................................. 11
Purchase of Shares....................................................... 11
Public Offering Price.................................................... 11
Purchase Procedures...................................................... 14
Redemption Procedures.................................................... 14
Redemption by Mail....................................................... 15
General.................................................................. 16
INVESTOR PROGRAMS......................................................... 16
Exchange Privilege....................................................... 16
Systematic Withdrawal Plan............................................... 19
Automatic Investment Program............................................. 19
DIVIDENDS AND DISTRIBUTIONS............................................... 20
TAXES..................................................................... 20
Federal.................................................................. 20
New York................................................................. 21
Miscellaneous............................................................ 21
MANAGEMENT OF THE FUND.................................................... 21
Investment Adviser....................................................... 21
Administrators........................................................... 22
Service Organizations.................................................... 23
Banking Laws............................................................. 23
DESCRIPTION OF CAPITAL STOCK.............................................. 23
CUSTODIAN AND TRANSFER AGENT.............................................. 24
EXPENSES.................................................................. 24
PERFORMANCE AND YIELD INFORMATION......................................... 24
MISCELLANEOUS............................................................. 25
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION.................................. 26
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR THE FUND'S STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
USTNYXP894
[LOGO OF UST MASTER TAX-EXEMPT FUNDS, INC. APPEARS HERE]
MASTER TAX-EXEMPT FUNDS, INC.
NEW YORK INTERMEDIATE-
TERM TAX-EXEMPT FUND
SERVICE SHARES
Prospectus August 1, 1995
<PAGE>
UST MASTER FUNDS, INC.
Money Fund
Government Money Fund
Treasury Money Fund
UST MASTER TAX-EXEMPT FUNDS, INC.
Short-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
August 1, 1995
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the Money Fund, Government Money
Fund and Treasury Money Fund of UST Master Funds, Inc. ("Master Fund") and the
Short-Term Tax-Exempt Fund of UST Master Tax-Exempt Funds, Inc. ("Master Tax-
Exempt Fund") dated August 1, 1995 (the "Prospectus"). Much of the information
contained in this Statement of Additional Information expands upon the subjects
discussed in the Prospectus. No investment in shares of the portfolios described
herein ("Shares") should be made without reading the Prospectus. A copy of the
Prospectus may be obtained by writing UST Master Funds c/o Mutual Funds Service
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES...............................
Additional Information on Portfolio Instruments.............
Additional Investment Limitations...........................
NET ASSET VALUE AND NET INCOME...................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................
INVESTOR PROGRAMS................................................
Systematic Withdrawal Plan..................................
Exchange Privilege..........................................
Other Investor Programs.....................................
DESCRIPTION OF CAPITAL STOCK.....................................
MANAGEMENT OF THE FUNDS..........................................
Directors and Officers......................................
Investment Advisory and
Administration Agreements.................................
Service Organizations.......................................
Expenses
Custodian and Transfer Agent................................
PORTFOLIO TRANSACTIONS...........................................
INDEPENDENT AUDITORS.............................................
COUNSEL..........................................................
ADDITIONAL INFORMATION CONCERNING TAXES..........................
Generally...................................................
Short-Term Fund.............................................
YIELD INFORMATION................................................
MISCELLANEOUS....................................................
FINANCIAL STATEMENTS.............................................
APPENDIX......................................................... A-1
</TABLE>
-ii-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
This Statement of Additional Information contains additional
information with respect to the Money Fund, Government Money Fund and Treasury
Money Fund of Master Fund (collectively, the "Taxable Funds") and the Short-Term
Tax-Exempt Fund of Master Tax-Exempt Fund (the portfolios are referred to
individually as a "Fund" and collectively as the "Funds"; Master Fund and Master
Tax-Exempt Fund are referred to individually as a "Company" and collectively as
the "Companies").
The investment objective of the Money Fund and the Government Money
Fund is to seek as high a level of current income as is consistent with
liquidity and stability of principal. The Money Fund generally invests in
money market instruments; the Government Money Fund generally invests in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and in repurchase agreements collateralized by such
obligations. The investment objective of the Treasury Money Fund is to seek
current income consistent with liquidity and stability of principal. The
Treasury Money Fund invests primarily in direct short-term obligations issued by
the U.S. Treasury and certain agencies or instrumentalities of the U.S.
Government with a view toward providing dividend income that is generally
considered exempt from state and local income taxes. The investment objective
of the Short-Term Tax-Exempt Fund ("Short-Term Fund") is to seek a moderate
level of current interest income exempt from Federal income taxes consistent
with stability of principal. The Short-Term Fund invests substantially all of
its assets in high-quality Municipal Securities (as defined in the Prospectus)
and, except during temporary defensive periods, maintains at least 80% of its
assets in tax-exempt obligations. All Funds invest in instruments that
generally have remaining maturities of not more than 13 months. The following
policies supplement the Funds' investment policies as set forth in the
Prospectus.
Additional Information on Portfolio Instruments
-----------------------------------------------
Variable and Floating Rate Instruments
--------------------------------------
With respect to variable and floating rate instruments described in
the Prospectus, United States Trust Company of New York ("U.S. Trust" or the
"Investment Adviser") will consider the earning power, cash flows and other
liquidity ratios of the issuers of such 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
<PAGE>
will be computed in accordance with guidelines established by the SEC.
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectus 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 Money book-entry system. Repurchase agreements are
considered loans by a Fund under the Investment Company Act of 1940 (the "1940
Act").
Securities Lending
-------------------
When the Money Fund or Government Money 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.
When-Issued and Forward Transactions
------------------------------------
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, the Fund's 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
-2-
<PAGE>
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 Funds 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 Short-Term 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 from the Short-Term Fund, at the Fund's option, specified
Municipal Securities at a specified price. The amount payable to the 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 Short-Term Fund at any time before the maturity of the underlying
Municipal Securities, and may be sold, transferred or assigned by the Fund only
with the underlying instruments.
The Short-Term Fund expects that "stand-by commitments" will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the 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 the Short-Term 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.
-3-
<PAGE>
The Short-Term Fund intends to enter into "stand-by commitments" only
with banks and broker/dealers which, in the Investment Adviser's opinion,
present minimal credit risks. In evaluating the creditworthiness of the issuer
of a "stand-by commitment," the Investment Adviser will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information.
Municipal Securities
--------------------
The Short-Term Fund invests primarily in Municipal Securities as
defined in the Prospectus. Municipal Securities include debt obligations issued
by governmental entities to obtain funds for various public purposes, including
the con struction 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 Secur ities are
"general obligations" and "revenue" issues, but the Short-Term Fund's portfolio
may also include "moral obligation" issues, which are normally issued by
special-purpose authorities. 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 Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's Ratings Group ("S&P") described in the Prospectus and 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 the 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 Investment Adviser will consider such an event in
determining whether the Short-Term Fund should continue to hold the
obligation.
-4-
<PAGE>
The payment of principal and interest on most securi ties purchased by
the Short-Term Fund 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 and the Prospectus. 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 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 or have been 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. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
Among other instruments, the Short-Term Fund 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 Fund may invest in long-term
tax-exempt instruments, such as municipal bonds and private activity bonds, to
the extent consistent with the maturity restrictions applicable to it.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
-5-
<PAGE>
investor's Federal alternative minimum taxable income, and corporate investors
must treat all tax-exempt interest as an item of tax preference. Master Tax-
Exempt Fund cannot, of course, predict what legislation may be proposed in the
future regarding the income tax status of interest on Municipal Securities, or
which proposals, if any, might be enacted. Such proposals, while pending or if
enacted, might materially adversely affect the availability of Municipal
Securities for investment by the Short-Term Fund and the liquidity and value of
its portfolio. In such an event, Master Tax-Exempt Fund would re-evaluate the
Fund's investment objective and policies and consider possible changes in its
structure or possible dissolution.
Opinions relating to the validity of Municipal Secur ities 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 Master Tax-
Exempt Fund nor the Investment Adviser will review the proceedings relating to
the issuance of Municipal Securities or the basis for such opinions.
Miscellaneous
-------------
The Funds may not invest in oil, gas, or mineral leases.
Additional Investment Limitations
---------------------------------
In addition to the investment limitations set forth in the Prospectus,
the Funds are subject to the investment limitations enumerated below, which may
be changed with respect to a particular Fund only by a vote of the holders of a
majority of such Fund's outstanding Shares (as defined under "Miscellaneous" in
the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of securities, or
maintain a short position;
2. 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 Short-Term 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;
3. Purchase or sell real estate, except that each Taxable Fund may
purchase securities of issuers which deal in
-6-
<PAGE>
real estate and may purchase securities which are secured by interests in real
estate; and except that the Short-Term Fund may invest in Municipal Securities
secured by real estate or interests therein;
4. Purchase or sell commodities or commodity con tracts, or invest
in oil, gas, or other mineral exploration or development programs;
5. Invest in or sell puts, calls, straddles, spreads, or any
combination thereof; and
6. 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.
In addition, the Money, Government Money and Treasury Money Funds 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 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;
8. Invest in bank obligations having remaining maturities in excess
of one year, except that securities subject to repurchase agreements may bear
longer maturities;
9. Invest in companies for the purpose of exercising management or
control;
10. Invest more than 5% of a Funds's total assets in securities
issued by companies which, together with any pre decessor, have been in
continuous operation for fewer than three years;
11. 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;
12. 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 Investment Company Act
of 1940;
-7-
<PAGE>
13. 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;
14. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
securities issued or guaranteed by the U.S. Government or domestic bank
obligations, and (b) neither all finance companies, as a group, nor all utility
companies, as a group, are considered a single industry for purposes of this
policy; and
15. 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.
In addition, the Short-Term Fund may not:
16. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objec tive, policies, and
limitations; and
17. 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;
18. 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;
19. 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
-8-
<PAGE>
20. 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.
* * *
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.
For the purpose of Investment Limitation No. 3, 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. 15 and 18 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. 19, to the
extent that the Short-Term 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. 19 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 permit the sale of Shares in certain states, the Companies
may make other commitments more restrictive than the investment policies and
limitations described above and in the Funds' Prospectus. Should the Companies
determine that any such commitment is no longer in the Funds' best interests,
they will revoke the commitment by terminating sales of the Shares to investors
residing in the state involved.
-9-
<PAGE>
NET ASSET VALUE AND NET INCOME
------------------------------
The Companies use the amortized cost method of valuation to value
Shares in the Funds. Pursuant to this method, a security is valued at its cost
initially, and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of fluctuating interest rates on
the market value of the security. This method may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund involved would receive if it sold the security. The market value of
portfolio securities held by the Funds can be expected to vary inversely with
changes in prevailing interest rates.
The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated.
If the Boards of Directors believe that the extent of any deviation from a
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take appropriate
steps to eliminate or reduce, to the extent reasonably practicable, any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming Shares in kind; reducing the number
of the Fund's outstanding Shares without monetary consideration; or utilizing a
net asset value per share determined by using available market quotations.
Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and discount earned on a Fund's assets, less (ii) amortization
of market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of a Company (e.g., administrative, legal, accounting, and directors' fees)
prorated to each portfolio of the Company on the basis of their relative net
assets.
-10-
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors,
and the Distributor has agreed to use appropriate efforts to solicit all
purchase orders. As described in the Prospectus, Shares may be sold to customers
("Customers") of the Investment Adviser, its affiliates and correspondent banks,
and qualified banks, savings and loan associations, broker/dealers and other
institutions ("Shareholder Organizations") that have entered into servicing
agreements with one of the Companies. Shares are also offered for sale to
institutional investors ("Institutional Investors") and to members of the
general public ("Direct Investors", and collectively with Institutional
Investors, "Investors"). Different types of Customer accounts at 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 of the Fund selected by the Customer. Investors purchasing
Shares may include officers, directors, or employees of the particular
Shareholder Organization.
As stated in the Prospectus, no sales charge is imposed by the
Companies on purchases of Shares. In addition, no sales load is charged on the
reinvestment of dividends or distributions or in connection with certain Share
exchanges as described in the Prospectus under "Investor Programs--Exchange
Privilege."
As described in the Prospectus, Direct Investors may redeem Shares by
writing a check. Checks to redeem Shares are drawn on the Companies' accounts
at United States Trust Company of New York. Direct Investors will be subject to
the same rules and regulations that U.S. Trust applies to checking accounts and
will have the same rights and duties with respect to stop-payment orders,
"stale" checks, unauthorized signatures, collection of deposits, alterations and
unauthorized endorsements as bank checking account customers do under the New
York Uniform Commercial Code. When a check is presented to U.S. Trust for
payment, U.S. Trust, as the shareholder's agent, will cause the Fund from which
the redemption is requested to redeem sufficient Shares in the shareholder's
account to cover the amount of the check.
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 New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the Securities and Exchange Commission; (b) the
-11-
<PAGE>
Exchange is closed for other than customary weekend and holiday closings; (c)
the Securities and Exchange Commission has by order permitted such suspension;
or (d) an emergency exists as determined by the Securities and Exchange
Commission.
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.
Under limited circumstances, the Companies may 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 will be limited to other securities (except for municipal
debt securities issued by state political subdivisions or their agencies or
instrumentalities) that: (a) meet the investment objective and policies of any
Fund acquiring such securities; (b) are acquired for investment and not for
resale; (c) are liquid securities that are not restricted as to transfer either
by law or liquidity of market; and (d) have a value that is readily
ascertainable (and not established only by evaluation procedures) as evidenced
by a listing on the American Stock Exchange, New York Stock Exchange or NASDAQ,
or as evidenced by their status as U.S. Government securities, bank certificates
of deposit, banker's acceptances, corporate and other debt securities that are
actively traded, money market securities and other similar securities with a
readily ascertainable value.
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.
-12-
<PAGE>
Prior to participating in a Systematic Withdrawal Plan, the Investor must
deposit any outstanding certificates for Shares with Mutual Funds Service
Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares. 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 paid on the Shares. 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 that Fund.
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares OF THE SAME SERIES of any
other portfolio of the Companies. 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. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies reserve the
right to limit the number of exchange requests of Investors and Customers of
Shareholder Organizations to no more than six per year. The Companies may
modify or terminate the exchange program at any time upon 60 days' written
notice to shareholders, and may reject any exchange request.
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 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.
Other Investor Programs
-----------------------
As discussed in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program. Shares of the Money,
Government Money and Treasury
-13-
<PAGE>
Money Funds may also be purchased in connection with certain Retirement
Programs.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Master Fund's Charter authorizes its Board of Directors to issue up to
35 billion full and fractional shares of capital stock; and Master Tax-Exempt
Fund's Charter authorizes its Board of Directors to issue up to 14 billion full
and fractional shares of capital stock. 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. The Prospectus
describes the classes of shares into which the Companies' authorized capital is
currently classified.
Shares have no preemptive rights and only such con version or exchange
rights as the Boards of Directors may grant in their discretion. When issued
for payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund,
shareholders of that Fund are entitled to receive the assets available for
distribution belonging to that Fund and a proportionate distribution, based upon
the relative asset values of the portfolios of the Company involved, of any
general assets of that Company not belonging to any particular portfolio of that
Company which are available for distribution. In the event of a liquidation or
dissolution of either Company, shareholders of such Company will be entitled to
the same distribution process.
Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of a Company's
aggregate outstanding shares may elect all of that Company's directors,
regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a
-14-
<PAGE>
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, the approval of principal
underwriting contracts, 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.
-15-
<PAGE>
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
----------------------
The directors and executive officers of the Companies, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows (the listed positions apply to both ):
<TABLE>
<CAPTION>
Position Principal Occupation
with the During Past 5 Years and
Name and Address Companies Other Affiliations
---------------- --------- -----------------------
<S> <C> <C>
Alfred C. Tannachion* Chairman of the Retired.
1135 Hyde Park Court Board, President
Mahwah, NJ 07430 and Treasurer
Age 69
Donald L. Campbell Director Retired; Senior Vice
333 East 69th Street President, Royal
Apt. 10-H Insurance Company, Inc.,
New York, NY 10021 until August, 1989;
Age 69 Director, Royal Life
Insurance Co. of N.Y.
Joseph H. Dugan Director Retired; President, CEO
913 Franklin Lake Road and Director, L.B. Foster
Franklin Lakes, NJ 07417 Company (tubular products),
Age 70 from September, 1987 until
May, 1990; Executive Vice
President and COO, L. B. Foster
Company, from September, 1986
until September, 1987; Senior
Vice President --Finance, Chief
Financial Officer and Director,
Todd Shipyards Corporation,
prior to January 3, 1986.
Wolfe J. Frankl Director Director, Deutsche Bank
40 Gooseneck Lane Financial, Inc.; Director,
Charlottesville, VA 22903 The Harbus Corporation;
Age 74 Trustee, Mariner Funds
Trust; Managing Director --
North America, Berlin Economic
Development Corp., prior to
1988.
Robert A. Robinson Director President Emeritus, The
Church Pension Fund Church Pension Fund and its
800 Second Avenue affiliated companies, since
New York, NY 10017 1968; Trustee, Mariner
Age 69 Funds Trust; Trustee, H.B.
</TABLE>
______________________
*This director is considered to be an "interested person" of the Companies as
defined in the 1940 Act.
-16-
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation
with the During Past 5 Years and
Name and Address Companies Other Affiliations
---------------- --------- -----------------------
<S> <C> <C>
and F.H. Bugher Foundation and
Director of its wholly owned
subsidiaries --Rosiclear Lead
and Flourspar Mining Co. and
The Pigmy Corporation;
Director, Morehouse Publishing
Co.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National of Drinker Biddle & Reath.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age 52
Frank M. Deutchki Assistant Vice President, Mutual
Mutual Funds Service Co. Secretary Funds Service Company
73 Tremont Street since February, 1989;
Boston, MA 02108-3913 Senior Vice President --
Age 41 Risk Analysis and avoid-
ance, Putnam Investor Services
(mutual fund group), from
October, 1987 to January, 1989.
John M. Corcoran Assistant Assistant Vice President,
Mutual Funds Service Co. Treasurer Manager of Administration,
73 Tremont Street Mutual Funds Service
Boston, MA 02108-3913 Company, since October
Age 30 1993; Audit Manager, Ernst &
Young, from August, 1987 to
September, 1993.
</TABLE>
Each director receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum with respect to each
Company for services in such capacity. Drinker Biddle & Reath, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Companies. The
employees of Mutual Funds Service Company 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 Investment Adviser serves as
an officer, director or employee of the Companies. The directors and officers
of the Companies as a group own less than 1% of the Shares of each Fund.
-17-
<PAGE>
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal
year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from the Companies
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Companies Expenses to Directors
--------------- ----------------- ---------- ------------------
<S> <C> <C> <C>
Alfred C. Tannachion $40,000 None $40,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $30,000 None $30,000
Director
Joseph H. Dugan $30,000 None $30,000
Director
Wolfe J. Frankl $30,000 None $30,000
Director
Robert A. Robinson
Director $30,000 None $30,000
</TABLE>
___________________________
* The "Fund Complex" consists of UST Master Funds, Inc., UST Master Tax-Exempt
Funds, Inc. and UST Master Variable Series, Inc. For the fiscal year ended
March 31, 1995, UST Master Variable Series, Inc. did not pay any directors'
fees.
Investment Advisory and Administration Agreements
-------------------------------------------------
United States Trust Company of New York serves as Investment Adviser
to the Funds. In the Investment Advisory Agreements, U.S. Trust has agreed to
provide the services described in the Prospectus. The Investment 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. See "Expenses" in the
Prospectus.
For the fiscal year ended March 31, 1993, Master Fund paid the
Investment Adviser $1,776,065, $2,102,373 and $610,108 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Master Tax-Exempt Fund paid the Investment Adviser $1,629,056 with
respect to the Short-Term Fund.
-18-
<PAGE>
For the fiscal year ended March 31, 1994, Master Fund paid the
Investment Adviser $2,183,204, $1,897,581 and $702,230 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Master Tax-Exempt Fund paid the Investment Adviser $1,697,812 with
respect to the Short-Term Tax-Exempt Fund. For the fiscal year ended March 31,
1994, the Investment Adviser waived fees totalling $14,775, $20,874, $1,704 and
$20,732 with respect to the Money, Government Money, Treasury Money and Short-
Term Tax-Exempt Funds, respectively.
For the fiscal year ended March 31, 1995, Master Fund paid the
Investment Adviser $1,781,897, $1,665,344 and $674,259 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Master Tax-Exempt Fund paid the Investment Adviser $1,698,879 with
respect to the Short-Term Fund. For the fiscal year ended March 31, 1995, the
Investment Adviser waived fees totalling $204,060, $173,321, $45,366 and
$236,867 with respect to the Money, Government Money, Treasury Money and Short-
Term Funds respectively.
The Investment Advisory Agreements provide that the Investment 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 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 on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder. In addition, the Investment 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.
Mutual Funds Service Company ("MFSC") and Concord Holding Corporation
(the "Administrators") jointly served as the Funds' administrators until July
31, 1995. 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 Securities and Exchange Commission, 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.
-19-
<PAGE>
Effective August 1, 1995, administrative services will be provided to
the Funds by MFSC and Federated Administrative Services, an affiliate of the
Distributor, under administration agreements having substantially the same terms
as the Administration Agreements currently in effect.
For the fiscal year ended March 31, 1993, Master Fund paid the
Administrators $1,100,322, $1,301,645 and $315,026 in the aggregate with respect
to the Money, Government Money and Treasury Money Funds, respectively. For the
same period, Master Tax-Exempt Fund paid the Administrators $1,009,414 in the
aggregate with respect to the Short-Term Fund.
For the fiscal year ended March 31, 1994, Master Fund paid the
Administrators $1,362,669, $1,183,297 and $360,869 in the aggregate with respect
to the Money, Government Money and Treasury Money Funds, respectively. For the
same period, Master Tax-Exempt Fund paid the Administrators $1,060,325 in the
aggregate with respect to the Short-Term Tax-Exempt Fund. For the fiscal year
ended March 31, 1994, the Administrators waived fees totalling $384 and $358
with respect to the Government Money and Treasury Money Funds, respectively.
For the fiscal year ended March 31, 1995, Master Fund paid the
Administrators $1,223,349, $1,131,530 and $369,056 in the aggregate with respect
to the Money Fund, Government Money Fund and Treasury Money Fund, respectively.
For the same period, Master Tax-Exempt Fund paid the Administrators $1,193,896
in the aggregate with respect to the Short-Term Fund. For the fiscal year ended
March 31, 1995, the Administrators waived fees totalling $1,087 and $351 with
respect to the Government Money and Treasury Money Funds, respectively.
Service Organizations
---------------------
As stated in the Prospectus, the Companies will enter into agreements
with Service Organizations. Such shareholder servicing agreements will require
the Service Organizations to provide shareholder administrative services to
their Customers who beneficially own Shares in consideration for a Fund's
payment (on an annualized basis) of up to .40% of the average daily net assets
of the Fund's Shares beneficially owned by Customers of the Service
Organization. Such services with respect to a Fund may include: (a) assisting
Customers in designating and changing dividend options, account designations and
addresses; (b) providing necessary personnel and facilities to establish and
maintain certain shareholder accounts and records, as may reasonably be
requested from time to time by the Companies; (c) assisting in processing
purchases, exchange and redemption transactions; (d) arranging for the wiring
of funds; (e) transmitting and receiving funds in connection with Customer
orders to purchase, exchange or redeem Shares; (f) verifying and
-20-
<PAGE>
guaranteeing Customer signatures in connection with redemption orders, transfers
among and changes in Customer-designated accounts; (g) providing periodic
statements showing a Customer's account balances and, to the extent practicable,
integrating of such information with information concerning other client
transactions otherwise effected with or through the Service Organization; (h)
furnishing on behalf of the Companies' distributor (either separately or on an
integrated basis with other reports sent to a Customer by the Service
Organization) periodic statements and confirmations of all purchases, exchanges
and redemptions of Shares in a Customer's account required by applicable federal
or state law; (i) transmitting proxy statements, annual reports, updating
prospectuses and other communications from the Companies to Customers; (j)
receiving, tabulating and transmitting to the Companies proxies executed by
Customers with respect to annual and special meetings of shareholders of the
Companies; (k) providing reports (at least monthly, but more frequently if so
requested by the Companies' distributor) containing state-by-state listings of
the principal residences of the beneficial owners of the Shares; and (l)
providing or arranging for the provision of such other related services as the
Companies or a Customer may reasonably request.
The Companies' agreements with Service 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
Service Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Service 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 Service
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 Service 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 non-interested Directors.
For the fiscal years ended March 31, 1995 and 1994, payments to
Service Organizations totalled $204,060 and $14,775, $174,408 and $21,258,
$45,717 and $2,062 and $236,867 and $20,732 with respect to the Money,
Government Money, Treasury Money and Short-Term Tax-Exempt Funds, respectively.
Of these
-21-
<PAGE>
respective amounts, $203,572 and $14,775, $171,257 and $20,233, $44,896 and
$1,075 and $236,399 and $20,732 were paid to affiliates of U.S. Trust with
respect to the Money, Government Money, Treasury Money and Short-Term Tax-Exempt
Funds.
Expenses
--------
Except as otherwise noted, the Investment 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); Securities and Exchange Commission 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; costs of shareholder reports and meetings; and any extraordinary
expenses. The Funds also pay any brokerage fees and commissions in connection
with the purchase of portfolio securities.
If the expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Investment
Adviser and the Administrators will reimburse such Fund for a portion of any
such excess to the extent required by such regulations in proportion to the fees
received by them in such year up to the amount of the fees payable to them,
provided, however, to the extent required by such state regulations, the
Investment Adviser and the Administrators have agreed to effect such
reimbursement regardless of the fees payable to them. The amounts of the above
reimbursements, if any, will be estimated, reconciled and paid on a monthly
basis. To the Companies' knowledge, of the applicable expense limitations in
effect on the date of this Statement of Additional Information, none is more
restrictive than the following: 2 1/2% of the first $30 million of average
annual net assets, 2% of the next $70 million of average annual net assets and 1
1/2% of average annual net assets in excess of $100 million.
Custodian and Transfer Agent
----------------------------
United States Trust Company of New York also serves as custodian of
the Fund's assets. Under the custodian agreement, U.S. Trust has agreed to (i)
maintain a separate account or accounts in the name of the Fund; (ii) make
receipts and disbursements of money on behalf of the Fund; (iii) collect and
receive all income and other payments and distributions on account of the Fund's
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 Master Tax-Exempt Fund's Board of
Directors concerning the Fund's operations. U.S. Trust is entitled to monthly
fees for furnishing custodial services according to the following fee schedule:
on the face value of debt securities and the market value of equity securities,
a fee at the annual rate of .05%; on issues held, $50.00 for each physical issue
held, $25.00 for each book-entry issue held and 1/4 of 1% of market value for
each foreign issue held; on transactions, $25.00 for each physical transaction,
$15.00 for each book-entry transaction and $50.00 for each foreign security
transaction. In addition, U.S. Trust is entitled to reimbursement for its
out-of-pocket expenses in connection with the above services.
U.S. Trust also serves as the Fund's transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust has agreed to (i) issue and
redeem Shares; (ii) address and mail all communications by the Fund to its
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 Master Tax-Exempt Fund
concerning the Fund's operations. For its transfer agency, dividend disbursing,
and subaccounting services, U.S. Trust is entitled to receive $15.00 per annum
per account and subaccount. In addition, U.S. Trust 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 may, at its own expense, open and maintain custody accounts
with respect to the Fund with other banks or trust companies, and may delegate
its transfer agency obligations to another transfer agent registered or
qualified under applicable law, provided that U.S. Trust shall remain liable for
the performance of all of its custodial and transfer agency duties under the
Custodian and Transfer Agency Agreement, notwithstanding any delegation.
Pursuant to this provision in the agreement, U.S. Trust has entered into a
sub-transfer agency arrangement with MFSC, an affiliate of U.S. Trust, with
respect to accounts of shareholders who are not Customers of U.S. Trust. For
the services provided by MFSC, U.S. Trust has agreed to pay MFSC $15.00 per
annum per account or subaccount plus out-of-pocket expenses. MFSC receives no
fee directly from Master Tax-Exempt Fund for any of its sub-transfer agency
services.
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<PAGE>
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Investment Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of all portfolio securities of each of
the Funds.
The Funds do not intend to seek profits from short-term trading. Their
annual portfolio turnover will be relatively high, but brokerage commissions are
not normally paid on money market instruments, and portfolio turnover is not
expected to have a material effect on the net income of the Funds.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere.
The Investment Advisory Agreements between the Companies and the
Investment Adviser provide that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment 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
Investment 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 Investment 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 Investment Adviser to the
-23-
<PAGE>
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 Investment Adviser and
does not reduce the investment advisory fees payable by the Funds. Such
information may be useful to the Investment 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 Investment Adviser
in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Distributor, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the Securities and Exchange Commission.
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 Investment 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 Investment 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 Investment 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 Companies as of the close of their most recent fiscal year.
As of March 31, 1995, the following portfolios of Master Fund held the following
securities of Master Fund's regular brokers or dealers or their parents: (a) the
Money Fund held the following security: repurchase agreement with Nomura
Securities, Inc. in the principal amount of $19,685,063; repurchase agreement
with Fuji Securities, Inc. on the principal amount of $20,000,000; commercial
paper of Merrill Lynch & Co., Inc. on the principal amount of $35,000,000, and
commercial paper of UBS Finance on the principal amount of $30,000,000; (b) the
Government Money Fund held the following securities: repurchase agreement with
Nomura Securities, Inc. on the principal amount of $20,216,462 and repurchase
agreement with Fuji Securities, Inc. on the principal amount of $20,000,000; (c)
the International Fund held the
-24-
<PAGE>
following security: 27,000 shares of Nomura Securities Co., Ltd.; and (d) the
Pacific/Asia Fund held the following security: 26,000 shares of Nomura
Securities Co., Ltd. Nomura Securities International, Inc., Fuji Bank & Trust,
Merrill Lynch, Pierce, Fenner & Smith, Inc. and UBS Securities are considered
to be a regular brokers and dealers of Master Fund. As of March 31, 1995, Master
Tax-Exempt Fund held no securities of Master Tax-Exempt Fund's regular brokers
or dealers and their parents.
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, 1995 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 (of which Mr. McConnel, Secretary of the
Companies, is a partner), located at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, is counsel to the Companies, and will pass upon the legality
of the Shares offered by the Prospectus.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
---------
The following supplements the tax information contained in the
Prospectus.
Each of the Funds is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. If, for any reason, a Fund does not qualify
for a taxable year for the special Federal tax treatment afforded regulated
investment companies, such Fund would be subject to Federal tax on all of its
taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether
or not derived from interest on Municipal Securities) would be taxable as
ordinary income to shareholders to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount
-25-
<PAGE>
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.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends 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."
Short-Term Fund
---------------
The Short-Term Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Short-Term Fund would not be suitable for tax-exempt
institutions and may not be suitable 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 Short-Term Fund dividends
being tax-exempt, but such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, the Short-Term Fund 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 the Short-Term Fund to pay exempt-interest dividends for
any taxable year, at least 50% of the aggregate value of the 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 Short-
Term Fund will notify its shareholders of the portion of the
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<PAGE>
dividends paid by the Fund which constitutes an exempt-interest dividend with
respect to such taxable year. However, the aggregate amount of dividends so
designated by the Short-Term Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Short-
Term 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 the Short-Term Fund with respect to any taxable year which qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Short-Term Fund for such year.
A percentage of the interest on indebtedness incurred by a shareholder
to purchase or carry the Short-Term Fund's Shares, equal to the percentage of
the total non-capital gain dividends distributed during the shareholders taxable
year that is exempt-interest dividends, is not deductible for Federal income tax
purposes.
Master Tax-Exempt Fund intends to distribute to shareholders of the
Short-Term Fund any investment company taxable income earned by the Short-Term
Fund for each taxable year. In general, the Short-Term Fund's investment
company taxable income will be its taxable income (such as 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. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
YIELD INFORMATION
-----------------
The standardized annualized seven-day yields for the Shares of the
Funds are computed separately by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the Fund
involved, having a balance of one Share at the beginning of the period, dividing
the net change in account value by the value of the account at the beginning of
the period to obtain the base period return, and multiplying the base period
return by (365/7). The net change in the value of an account in each of the
Funds includes the value
-27-
<PAGE>
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.
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 current yields for the Funds' Shares may be obtained by calling
(800) 233-9180. For the seven-day period ended March 31, 1995, the annualized
yields for Shares of the Money Fund, Government Money Fund, Treasury Money Fund
and Short-Term Fund were 5.69%, 5.62%, 5.30% and 3.64%, respectively, and the
effective yields for Shares of the Funds were 5.85%, 5.78%, 5.44% and 3.71%,
respectively.
The "tax-equivalent" yield of the Short-Term 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%.
-28-
<PAGE>
Based on the foregoing calculation, the annualized tax-equivalent
yield of the Short-Term Fund for the seven-day period ended March 31, 1995 was
5.28%.
MISCELLANEOUS
-------------
As used in the Prospectus, "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 11, 1995, U.S. Trust held of record substantially all of
the outstanding Shares in the Money Fund, Treasury Money Fund, Government Money
Fund, and Short-Term Tax-Exempt Fund, but did not own such Shares beneficially
because it did not have discretion to vote or invest such Shares.
As of July 11, 1995, the name, address and percentage ownership of
each person, in addition to U.S. Trust, that beneficially owned 5% or more of
the outstanding shares of the (i) Government Money Fund were as follows: NCNB
Corp. Retirement Team, c/o United States Trust Company of New York, 114 West
47th Street, New York, New York 10056, 6.9%; Fund American Ent. Holdings, Inc.,
c/o United States Trust Company of New York, 114 West 47th Street, New York, New
York 10056, 14.3%; and White River Corp., c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10056, 5.7%; and (ii) Treasury
Money Fund was as follows: W.H. Reaves Co. Inc., c/o United States Trust Company
of New York, 114 West 47th Street, New York, New York 10056, 5.8%.
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<PAGE>
FINANCIAL STATEMENTS
--------------------
The Companies' Annual Reports to Shareholders for the fiscal year
ended March 31, 1995 (the "Annual Reports") for the fixed income and tax-exempt
fixed income portfolios accompany this Statement of Additional Information. The
financial statements in the Annual Reports for the Money, Government Money,
Treasury Money and Short-Term Tax-Exempt Funds (the "Financial Statements") are
incorporated in this Statement of Additional Information by reference. The
Financial Statements included in the Annual Reports for the fiscal year ended
March 31, 1995 have been audited by the Companies' independent auditors, Ernst &
Young LLP, whose reports thereon also appear in such Annual Reports and are
incorporated herein by reference. The Financial Statements in such Annual
Reports have been incorporated herein in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing. Additional
copies of the Annual Reports may be obtained at no charge by telephoning MFSC at
the telephone number appearing on the front page of this Statement of Additional
Information.
-30-
<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
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.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues ASSIGNED this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
A-3
<PAGE>
interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment 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 the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments 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" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
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
A-6
<PAGE>
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 risks appear somewhat larger than in "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 considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that
A-7
<PAGE>
the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in
A-9
<PAGE>
business, economic or financial conditions may increase investment risk albeit
not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson 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 represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
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.
A-10
<PAGE>
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"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 rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"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" - Loans bearing this designation are of the best
quality, enjoying strong protection by established
A-11
<PAGE>
cash flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
UST MASTER FUNDS, INC.
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
UST MASTER TAX-EXEMPT FUNDS, INC.
Short-Term Tax - Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
August 1, 1995
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectuses for the Short-Term Government
Securities Fund, Intermediate-Term Managed Income Fund and Managed Income Fund
of UST Master Funds, Inc. ("Master Fund") and Short-Term Tax-Exempt Securities
Fund, Intermediate-Term Tax-Exempt Fund and Long-Term Tax-Exempt Fund of UST
Master Tax-Exempt Funds, Inc. ("Master Tax-Exempt Fund") dated August 1,
1995 , respectively (the "Fixed-Income Funds Prospectus" and the "Tax-
Exempt Funds Prospectus" , respectively; together, the "Prospectuses").
Much of the information contained in this Statement of Additional Information
expands upon the subjects discussed in the Prospectuses. No investment in
Service Shares of the portfolios described herein ("Shares") should be
made without reading the Prospectuses. A copy of each Prospectus may be
obtained by writing UST Master Funds c/o Mutual Funds Service Company,
73 Tremont Street, Boston, MA 02108-3913 or by calling (800)
446-1012 .
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . . . . . . .
Additional Information on Portfolio Instruments. . . . . . .
Additional Investment Limitations. . . . . . . . . . . . . .
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION. . . . . . . . . .
INVESTOR PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . .
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . .
Other Investor Programs. . . . . . . . . . . . . . . . . . .
DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . .
Directors and Officers . . . . . . . . . . . . . . . . . . .
Investment Advisory and Administration Agreements. . . . . .
Service Organizations. . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Custodian and Transfer Agent . . . . . . . . . . . . . . . .
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . .
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . . . . . . . .
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . .
Generally . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-Exempt Funds. . . . . . . . . . . . . . . . . . . . . .
Taxation of Certain Financial Instruments . . . . . . . . .
PERFORMANCE AND YIELD INFORMATION . . . . . . . . . . . . . . . .
Yields and Performance. . . . . . . . . . . . . . . . . . .
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A. . . . . . . . . . . . . . . . . . . . . . . . . . . .
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
This Statement of Additional Information contains additional
information with respect to the Short-Term Tax-Exempt Securities Fund,
Intermediate-Term Tax-Exempt Fund and Long-Term Tax-Exempt Fund (collectively,
the "Tax-Exempt Funds") of Master Tax-Exempt Fund and the Short-Term Government
Securities Fund, Intermediate-Term Managed Income Fund and Managed Income Fund
of Master Fund (collectively, the "Fixed-Income Funds"). The portfolios are
referred to individually as a "Fund" and collectively as the "Funds"; Master
Tax-Exempt Fund and Master Fund are referred to individually as a "Company" and
collectively as the "Companies" .
For ease of reference, the various Funds are referred to as follows:
Short-Term Tax-Exempt Securities Fund as "Short - Term 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 Income Fund" .
The following policies and disclosures supplement the Funds'
investment objectives and policies as set forth in the Prospectuses.
Additional Information on Portfolio Instruments
-----------------------------------------------
Municipal Obligations
---------------------
The Tax-Exempt Funds invest substantially all of their assets in
Municipal Obligations as defined in the Prospectus. 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 are
"general obligation" and "revenue" issues, but the Tax-Exempt Funds' portfolios
may include "moral obligation" issues, which are normally issued by special-
purpose authorities. There are, of course, variations in the quality of
Municipal Obligations, both within a particular classification and between
-1-
<PAGE>
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's Ratings Group ("S&P") described in the Prospectus and 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. United States Trust Company of New York,
the Funds' investment adviser ("Investment Adviser" or "U.S. Trust"), 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 and the
Prospectus. 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 or have been 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
-2-
<PAGE>
states to issue private activity bonds for such purposes in order to encourage
corporations to locate within their communities. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities.
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 long-term tax-exempt instruments, such as municipal bonds and
private activity bonds, to the extent consistent with the maturity restrictions
applicable to it.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Obligations. For example, under the Tax Reform Act of
1986, as amended, interest on certain private activity bonds must be included in
an investor's alternative minimum taxable income, and corporate investors must
treat all tax-exempt interest as an item of tax preference. Master Tax-Exempt
Fund cannot, of course, predict what legislation may be proposed in the future
regarding the income tax status of interest on Municipal Obligations, or which
proposals, if any, might be enacted. Such proposals, while pending or if
enacted, might materially adversely affect the availability of Municipal
Obligations for investment by the Tax-Exempt Funds and the liquidity
and value of their portfolios. In such an event, Master Tax-Exempt Fund would
reevaluate the Funds' investment objectives and policies and consider possible
changes in their structure or possible dissolution.
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 Master Tax-
Exempt Fund nor the Investment Adviser will review the proceedings relating to
the issuance of Municipal Obligations or the basis for such opinions.
The IT Income and Managed Income Funds may, when deemed appropriate by
the Investment Adviser in light of the Funds' investment objective, 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 Income and Managed Income Funds that
are
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<PAGE>
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 as described in the Prospectus. 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
---------------------
The repurchase price under the repurchase agreements described in the
Prospectus 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 Investment
Company Act of 1940 (the "1940 Act").
Securities Lending
------------------
When the ST Government Fund, IT Income Fund and Managed Income Fund
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.
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-
-4-
<PAGE>
Import Bank of the United States, Small Business Administration, Government
National Mortgage Association, Federal National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks and Maritime Administration.
When-Issued and Forward Transactions
------------------------------------
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 exceeded
25% of the value of its assets.
A Fund will purchase securities on a "when-issued" or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued "
purchase or a forward commitment to purchase securities and any subsequent
fluctuations in their market value are taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. The Fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date.
-5-
<PAGE>
Stand-By Commitments
--------------------
The Managed Income and IT 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.
The Managed Income and IT 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 Income Funds and the Tax-Exempt
Funds intend to enter into "stand-by commitments" only with banks and
broker/dealers which, in the Investment Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Investment Adviser will review periodically the issuer's
assets, liabilities, contingent claims and other relevant financial information.
Commercial Paper
----------------
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 Investment Adviser at the time of purchase to be of comparable quality to
rated instruments that may be acquired by the particular Fund. Each Fund will
generally limit its investments in such unrated commercial paper to 5% of its
total assets.
-6-
<PAGE>
Futures Contracts
-----------------
Each Fund may invest in futures contracts (interest rate futures
contracts or municipal bond index futures contracts, as applicable). Futures
contracts will not be entered into for speculative purposes, but to hedge risks
associated with a Fund's securities investments. 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, 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.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability 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. 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.
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
-7-
<PAGE>
result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Additional Investment Limitations
---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Funds are subject to the investment limitations enumerated below.
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
defined under "Miscellaneous" in the Prospectuses). However, investment
limitations which are "operating policies" with respect to a Fund may be changed
by Master Fund's or Master Tax-Exempt Fund's Board of Directors upon
reasonable notice to investors.
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-
-8-
<PAGE>
Exempt Funds' investment objectives, policies, and limitations may be deemed to
be underwriting; and except insofar as the Managed Income Fund might be deemed
to be an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities;
2. Purchase or sell real estate, except that each Tax-Exempt Fund may
invest in Municipal Obligations secured by real estate or interests therein, and
the Managed Income and Intermediate-Term 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; and
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.
The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds, but are operating
policies with respect to the Short-Term Tax-Exempt, ST Government and IT Income
Funds. The Funds may not:
4. 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; and
5. Write or sell puts, calls, straddles, spreads, or combinations
thereof; 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:
6. 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 limitations are fundamental with respect to
the IT Tax-Exempt and LT Tax-Exempt Funds, but are operating policies with
respect to the Short-Term Tax-Exempt Fund. A Tax-Exempt Fund may not:
7. 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; and
8. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or
-9-
<PAGE>
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
Income and ST Government Funds.
A Fixed-Income Fund may not:
9. Invest in companies for the purpose of exercising management or
control;
10. 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;
11. Purchase foreign securities; provided that subject to the limit
described below, the IT Income and Managed Income Funds may purchase (a) dollar-
denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and
12. 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 limitation is 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:
13. 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
Short-Term Tax-Exempt, ST Government and IT Income
-10-
<PAGE>
Funds. The Short-Term Tax-Exempt, ST Government and IT Income Funds may not:
14. 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.
* * *
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, Master Fund currently
intends to limit the IT 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. Included within that amount, but not to
exceed 2% of the value of the IT Income or Managed Income Fund's net assets, may
be warrants which are not listed on the New York or American Stock Exchange.
For the purpose of this limitation, warrants acquired by the IT Income or
Managed Income Fund in units or attached to securities will be deemed to be
without value.
The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.
The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities
on margin, short sales of securities and the maintenance of a short position;
the issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.
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 order to permit the sale of Shares in certain states, Master Fund
may make other commitments more restrictive than the investment policies and
limitations described above and in the Prospectus. Should the Companies
determine that any such commitment is no longer in the Funds' best interests,
they will revoke the commitment by terminating sales of the Shares to investors
residing in the state involved.
-11-
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood
Services , Inc. (the "Distributor"), a wholly-owned subsidiary of
Federated Investors , and the Distributor has agreed to use appropriate
efforts to solicit all purchase orders. As described in the Prospectus, Shares
may be sold to customers ("Customers") of the Investment Adviser, its affiliates
and correspondent banks, and qualified banks, savings and loan associations,
broker/dealers and other institutions ("Shareholder Organizations") that have
entered into servicing agreements with one of the Companies. Shares are also
offered for sale to institutional investors ("Institutional Investors") and to
members of the general public ("Direct Investors", and collectively with
"Institutional Investors", " Investors"). 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 of the Fund
selected by the Customer. Investors purchasing Shares may include officers,
directors, or employees of the particular Shareholder Organization.
Shares of the Funds are offered for sale with a maximum sales charge
of 4.50%. An illustration of the computation of the offering price per share of
the Funds, using the value of each Fund's net assets and number of outstanding
securities at the close of business on March 31, 1995 , is as follows:
<TABLE>
<CAPTION>
Short-Term LT Tax-
Tax-Exempt IT Tax-Exempt Exempt
Fund Fund Fund
------------ ------------- -----------
<S> <C> <C> <C>
Net Assets.............. $ 48,187,543 $234,990,220 $78,880,450
Outstanding Shares...... 6,927,683 26,690,412 8,511,184
Net Asset Value Per
Share................... $ 6.96 $ 8.80 $ 9.27
Sales Charge (4.50% of
the offering price)..... $ .33 $ .41 $ .44
Offering to Public...... $ 7.29 $ 9.21 $ 9.71
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Managed IT Income ST Government
Income Fund Fund Fund
----------- ----------- -------------
<S> <C> <C> <C>
Net Assets....................... $86,024,245 $47,928,448 $25,215,627
Outstanding Shares............... 10,251,319 7,095,338 3,657,258
Net Asset Value Per
Share............................ $ 8.39 $ 6.75 $ 6.89
Sales Charge (4.50% of
the offering price).............. $ .40 $ .32 $ .3
Offering to Public...... $ 8.79 $ 7.07 $ 7.21
</TABLE>
As stated in the Prospectus, the sales load described above will not
be applicable to: (a) purchases of Shares by customers of the Investment Adviser
or its affiliates; (b) trust, agency or custodial accounts opened through the
trust department of a bank, trust company or thrift institution, provided that
appropriate notification of such status is given at the time of investment; (c)
companies, corporations and partnerships (excluding full service broker/dealers
and financial planners, registered investment advisers and depository
institutions not covered by the exemptions in (d) and (e) below); (d) financial
planners and registered investment advisers not affiliated with or clearing
purchases through full service broker/dealers; (e) purchases of Shares by
depository institutions for their own account as principal; (f) exchange
transactions (described below under "Investor Programs -- Exchange Privilege")
where the Shares being exchanged were acquired in connection with the
distribution of assets held in a trust, agency or custodial account maintained
with the trust department of a bank; (g) corporate/business retirement plans
(such as 401(k), 403(b)(7), 457 and Keogh accounts) sponsored by the Distributor
and IRA accounts sponsored by the Investment Adviser; (h) company-sponsored
employee pension or retirement plans making direct investments in the Funds; (i)
purchases of Shares by officers, trustees, directors, employees, former
employees and retirees of the Companies, the Investment Adviser, the
Distributor or of any direct or indirect affiliate of either of them; (j)
purchases of Shares by all beneficial shareholders of the Companies as of May
22, 1989; (k) purchases of Shares by investment advisers registered under the
Investment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases
of Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with the Companies ; (m) purchase of
Shares by investors who are members of groups services by USAffinity Investment
Limited Partnership; and (n) customers of certain financial institutions who
purchase Shares through a registered representative of UST Financial Services
Corp. on the premises of their financial institutions . In addition, no
sales load is charged on the reinvestment of dividends or distributions or in
connection with certain share exchange transactions. Investors who have
previously redeemed shares in a portfolio of Master Fund or Master Tax-Exempt
Fund on which a sales load has been paid
-13-
<PAGE>
also have a one-time privilege of purchasing shares of another portfolio of
either Company at net asset value without a sales charge, provided that such
--------
privilege will apply only to purchases made within 30 calendar days from the
date of redemption and only with respect to the amount of the redemption.
For the fiscal years ended March 31, 1995, 1994 and
1993 , total sales charges paid by shareholders: for the IT Tax-
Exempt Fund were $17,776, $8,588 and $15,256 , respectively;
for the LT Tax-Exempt Fund were $4,088, $16,720 and $22,984 ,
respectively; for the Managed Income Fund were $973, $17,120 and
$24,570 , respectively. Of these respective amounts, the Distributor retained
$431, $6,693 and $13,214 with respect to the IT Tax-Exempt
Fund; $3,188, $9,491 and $11,296 with respect to the LT Tax-
Exempt Fund; and $973, $14,297 and $16,204 with respect to the
Managed Income Fund. Total sales charges paid by shareholders of the Short-Term
Tax-Exempt, ST Government and IT Income Funds for the fiscal years
ended March 31, 1995 and 1994 were $20 and $42,285, $1 and
$11,744 and $815 and $741, respectively. Of these respective amounts,
UST Distributors, Inc., the Funds' former Distributor , retained
$20 and $27,165 with respect to the Short-Term Tax-Exempt Fund, $1
and $9,788 with respect to the ST Government Fund and $815 and $660
with respect to the IT Income Fund. The balance was paid to selling dealers.
Shareholders of the Short-Term Tax-Exempt, ST Government and IT Income
Funds paid no sales charges for the period from December 31, 1992 (commencement
of operations) to March 31, 1993.
The Companies 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 New York Stock Exchange (the "Exchange") is restricted by
applicable rules and regulations of the Securities and Exchange Commission; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the Securities and Exchange Commission has by order permitted such
suspension; or (d) an emergency exists as determined by the Securities and
Exchange Commission.
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.
Under limited circumstances, the Companies may 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 will be limited to other securities (except for municipal
debt securities issued by state political subdivisions or their agencies or
instrumentalities) that: (a) meet the investment
-14-
<PAGE>
objective and policies of any Fund acquiring such securities; (b) are acquired
for investment and not for resale; (c) are liquid securities that are not
restricted as to transfer either by law or liquidity of market; and (d) have a
value that is readily ascertainable (and not established only by evaluation
procedures) as evidenced by a listing on the American Stock Exchange, New York
Stock Exchange or NASDAQ, or as evidenced by their status as U.S. Government
securities, bank certificates of deposit, banker's acceptances, corporate and
other debt securities that are actively traded, money market securities and
other similar securities with a readily ascertainable value.
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 Mutual Funds Service
Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares. 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 that Fund.
-15-
<PAGE>
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for Service Shares of
any other portfolio of the Companies. 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. The Companies may modify or
terminate the exchange program at any time upon 60 days' written notice to
shareholders, and may reject any exchange request. In order to prevent abuse
of this privilege to the disadvantage of other shareholders, the Companies
reserve the right to limit the number of exchange requests of Investors and
Customers of Shareholder Organizations to no more than six per year.
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 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.
Other Investor Programs
-----------------------
As described in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program. Shares of the Managed
Income, IT Income and ST Government Funds may also be purchased in connection
with certain Retirement Programs.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Master Fund's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of capital stock; Master Tax-
Exempt Fund's Charter authorizes its Board of Directors to issue up to fourteen
billion full and fractional shares of capital stock. 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,
-16-
<PAGE>
qualifications, and terms and conditions of redemption. The Prospectus
describes the classes of shares into which the Companies' authorized capital is
currently classified.
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 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, the approval of principal
underwriting contracts, 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
-17-
<PAGE>
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 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.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
----------------------
The directors and executive officers of the Companies, their
addresses, ages, principal occupations during the past five years, and
other affiliations are as follows (the listed positions apply to both
Companies):
-18-
<PAGE>
<TABLE>
<S> <C> <C>
Principal Occupation
Position with During Past 5 Years
Name and Address the Companies and Other Affiliations
---------------------- ---------------- ---------------------------
<S> <C> <C>
Alfred C. Tannachion// Chairman of the Retired.
1135 Hyde Park Court Board, President
Mahwah, NJ 07430 and Treasurer
Age 69
Donald L. Campbell Director Retired; Senior Vice
333 East 69th Street President, Royal
Apt. 10-H Insurance Company, Inc.,
New York, NY 10021 until August, 1989;
Age 69 Director, Royal Life
Insurance Co. of N.Y.
Joseph H. Dugan Director Retired; President, CEO
913 Franklin Lake Road and Director, L.B.
Franklin Lakes, NJ 07417 Foster Company, (tubular
Age 70 products), from September,
1987 until May, 1990;
Executive Vice President and
COO, L.B. Foster Company,
from September, 1986 until
September, 1987; Senior Vice
President--Finance, Chief
Financial Officer and
Director, Todd Shipyards
Corporation, prior to
January 3, 1986.
Wolfe J. Frankl Director Director, Deutsche Bank
40 Gooseneck Lane Financial, Inc.;
Charlottesville, VA 22903 Director, The Harbus
Age 74 Corporation; Trustee,
Mariner Funds Trust;
Managing Director -- North
America, Berlin Economic
Development Corp., prior to
1988.
</TABLE>
-19-
<PAGE>
<TABLE>
<S> <C> <C>
Robert A. Robinson Director President Emeritus,
Church Pension Fund The Church Pension Fund
800 Second Avenue and its affiliated
New York, New York 10017 companies since 1968;
Age 69 Trustee, Mariner Funds
Trust; 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; Director,
Morehouse Publishing Co.
W. Bruce McConnel, III Secretary Partner of the law
Philadelphia National firm of Drinker
Bank Building Biddle & Reath.
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age 52
Frank M. Deutchki Assistant Vice President
Mutual Funds Service Co. Secretary Mutual Funds Service
73 Tremont Street Company. Since February,
Boston, MA 02108-3913 1989; Senior Vice
Age 41 President
-- Risk Analysis and
Avoidance, Putnam Investor
Services (mutual fund
group), from October, 1987
to January, 1989.
John M. Corcoran Assistant Assistant Vice President,
Mutual Funds Service Co. Treasurer Manager of Administration,
73 Tremont Street Mutual Funds Service
Boston, MA 02108-3913 Company, since October,
Age 30 1993; Audit Manager, Ernst &
Young, from August, 1987 to
September, 1993.
</TABLE>
Each director receives an annual fee of $9,000 with respect
to each Company plus a per-Company meeting fee of $1,500 for each meeting
attended and is reimbursed for expenses incurred in attending meetings. The
Chairman of the Board is entitled to receive an additional $5,000 per annum with
respect to each Company for services in such capacity. Drinker Biddle & Reath,
of which Mr. McConnel is a partner, receives legal fees as counsel to the
Companies. The employees of Mutual Funds Service Company 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 Investment
Adviser serves as an officer, director or employee of the Companies. The
directors and officers of the Companies as a group own less than 1% of
the Shares of each Fund.
-20-
<PAGE>
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal
year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from the Companies
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Companies Expenses to Directors
----------------------- ----------------- ---------- ------------------
<S> <C> <C> <C>
Alfred C. Tannachion $40,000 None $40,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $30,000 None $30,000
Director
</TABLE>
/*/ The "Fund Complex" consists of UST Master Funds, Inc., UST Master
Tax-Exempt Funds, Inc. and UST Master Variable Series, Inc. For the fiscal
year ended March 31, 1995, UST Master Variable Series, Inc. did not pay any
directors' fees.
-21-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Joseph H. Dugan $30,000 None $30,000
Director
Wolfe J. Frankl $30,000 None $30,000
Director
Robert A. Robinson $30,000 None $30,000
Director
</TABLE>
Investment Advisory and Administration Agreements
---------------------------------------------------------
United States Trust Company of New York serves as Investment Adviser
to the Funds. In the Investment Advisory Agreements, U.S. Trust has agreed to
provide the services described in the Prospectus. The Investment 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.
For the fiscal year ended March 31, 1993, Master Tax-Exempt
Fund paid the Investment Adviser $908,764 with respect to the IT Tax-Exempt Fund
and $381,604 with respect to the LT Tax-Exempt Fund. For the same
period, Master Fund paid the Investment Adviser $679,262 with respect to the
Managed Income Fund and the Investment Adviser waived fees totalling $174,339
with respect to such Fund. For the period from December 31, 1992 (commencement
of operations) to March 31, 1993, Master Tax-Exempt Fund paid the Investment
Adviser $2,424 with respect to the Short-Term Tax-Exempt Fund and the Investment
Adviser waived fees totalling $10,372 with respect to such Fund. For the same
period, Master Fund paid the Investment Adviser $2,504 and $1,945 with respect
to the ST Government and IT Income Funds, respectively, and the Investment
Adviser waived fees totalling $4,865 and $7,000 with respect to such respective
Funds.
For the fiscal year ended March 31, 1994, the particular Company paid
the Investment Adviser advisory fees of $54,640, $137,367, $654,944, $143,413,
$1,052,739 and $426,183 with respect to the ST Government, IT Income, Managed
Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively, and the Investment Adviser waived advisory fees of
-22-
<PAGE>
$5,489, $439, $177,587, $1,948, $6,157 and $1,779 with respect to such
respective Funds.
For the fiscal year ended March 31, 1995, the particular Company
paid the Investment Adviser adivsory fees of $62,036, $142,883, $634,922,
$149,283, $801,081 and $374,134 with respect to the ST Goverment, IT Income,
Manager Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, the Investment Adviser waived fees totalling
$14,308, $8,255, $121,999, $12,322, $84,360 and $26,819 with respect to the ST
Government, IT Income, Managed Income, Short-Term Tax-Exempt, IT Tax-Exempt and
LT Tax-Exempt Funds, respectively.
The Investment Advisory Agreements provide that the Investment 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 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 on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder.
Mutual Funds Service Company ("MFSC") and Concord Holding Corporation
(the "Administrators") jointly served as the Funds' administrators
until July 31, 1995 . 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
Securities and Exchange Commission, 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 all aspects of the
Funds' operations.
Effective August 1, 1995, administrative services will
be provided to the Funds by MFSC and Federated Administrative Services,
an affiliate of the Distributor, under administration agreements having
substantially the same terms as the Administration Agreements currently in
effect.
For the fiscal year ended March 31, 1993, Master Tax-Exempt
Fund paid the Administrators $405,828 and $119,289 in the aggregate with respect
to the IT Tax-Exempt Fund and the LT Tax-Exempt Fund, respectively.
For the same period, Master Fund
-23-
<PAGE>
paid the Administrators $177,890 in the aggregate with respect to the Managed
Income Fund. For the period from December 31, 1992 (commencement of operations)
to March 31, 1993, Master Tax-Exempt Fund paid the Administrators $7,169 in the
aggregate with respect to the Short-Term Tax-Exempt Fund. For the same period,
Master Fund paid the Administrators $4,663 and $5,277 in the aggregate with
respect to the ST Government Fund and the IT Income Fund, respectively.
For the fiscal year ended March 31, 1994, Master Tax-Exempt
Fund paid the Administrators $74,732, $466,189 and $131,739 in the aggregate
with respect to the Short-Term Tax-Exempt Fund, IT Tax-Exempt Fund and
LT Tax-Exempt Fund, respectively, and the Administrators waived fees totalling
$519 with respect to the IT Tax-Exempt Fund. For the same period Master Fund
paid the Administrators in the aggregate $31,686, $58,869 and $171,157 with
respect to the ST Government, IT Income and Managed Income Funds, respectively,
and the Administrators waived fees totalling $95 with respect to the Managed
Income Fund.
For the fiscal year ended March 31, 1995, Master Tax-Exempt Fund
paid the Administrators $82,797, $386,614 and $123,173 in the aggregate with
respect to the Short-Term Tax-Exempt Fund, IT Tax-Exempt Fund and the LT Tax-
Exempt Fund respectively. For the same period, Master Fund paid MFSC and
Concord Holding Corporation $39,116, $66,481 and $154,370 in the aggregate with
respect to the ST Government, IT Income and Managed Income Funds, respectively.
For the same period, the Administrators waived fees totalling $2,634, $19,
$1,051, $356, $3,455 and $321 with respect to the ST Government, IT Income,
Manager Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.
Service Organizations
-------- ---------------
As stated in the Prospectus, a Company will enter into agreements with
Service Organizations. Such shareholder servicing agreements will require the
Service Organizations to provide shareholder administrative services to their
Customers who beneficially own Shares in consideration for a Fund's payment (on
an annualized basis) of up to .40% of the average daily net assets of the Fund's
Shares beneficially owned by Customers of the Service Organization. Such
services may include: (a) assisting Customers in designating and changing
dividend options, account designations and addresses; (b) providing necessary
personnel and facilities to establish and maintain certain shareholder accounts
and records, as may reasonably be requested from time to time by the Companies;
(c) assisting in processing purchases, exchange and redemption transactions; (d)
arranging for the wiring of funds; (e) transmitting and receiving funds in
connection with Customer orders to purchase, exchange or redeem
-24-
<PAGE>
Shares; (f) verifying and guaranteeing Customer signatures in connection with
redemption orders, transfers among and changes in Customer-designated accounts;
(g) providing periodic statements showing a Customer's account balances and, to
the extent practicable, integrating such information with information concerning
other client transactions otherwise effected with or through the Service
Organization; (h) furnishing on behalf of the Companies' distributor
(either separately or on an integrated basis with other reports sent to a
Customer by the Service Organization) periodic statements and confirmations of
all purchases, exchanges and redemptions of Shares in a Customer's account
required by applicable federal or state law; (i) transmitting proxy statements,
annual reports, updating prospectuses and other communications from the
Companies to Customers; (j) receiving, tabulating and transmitting to the
Companies proxies executed by Customers with respect to annual and special
meetings of shareholders of the Companies; (k) providing reports (at least
monthly, but more frequently if so requested by the Companies'
distributor) containing state - by - state listings of the
principal residences of the beneficial owners of the Shares; and (l)
providing or arranging for the provision of such other related services as the
Companies or a Customer may reasonably request.
The Companies' agreements with Service 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
Service Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Service 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 Service
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 Service 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 non-interested Directors.
For the fiscal year ended March 31, 1995 and 1994, payments to
Service Organizations under the Plans totalled $12,678 and $615,
$87,815 and $6,676, $27,140 and $1,779, $4,466 and $119,
$8,274 and $439 and $28,171 and $1,537 with respect to the Short-
Term Tax-Exempt , IT Tax-Exempt, LT Tax-Exempt, ST
-25-
<PAGE>
Government, IT Income and Managed Income Funds, respectively. Of these amounts
$11,475 and $615, $74,979 and $4,947, $25,075 and $1,779,
$3,649 and $119, $8,041 and $439 , $20,247 and $965 were
paid to affiliates of U.S. Trust with respect to the Short-Term Tax -
Exempt, IT Tax-Exempt , LT Tax-Exempt, ST Government, IT Income and
Managed Income Funds, respectively.
Expenses
--------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
advisory and administrative 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.
If the expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Investment
Adviser and the Administrators will reimburse such Fund for a portion of any
such excess to the extent required by such regulations in proportion to the fees
received by them in such year up to the amount of fees payable to them,
provided, however, to the extent required by such state regulations, the
Investment Adviser and the Administrators have agreed to effect such
reimbursement regardless of the fees payable to them. The amounts of the above
reimbursements, if any, will be estimated, reconciled and paid on a monthly
basis. To the Companies' knowledge, of the applicable expense
limitations in effect on the date of this Statement of Additional Information,
none is more restrictive than the following: 2 1/2% of the first $30 million of
average annual net assets, 2% of the next $70 million of average annual net
assets and l 1/2% of average annual net assets in excess of $100
million.
Custodian and Transfer Agent
----------------------------
United States Trust Company of New York also serves as custodian of
the Funds' assets. Under the custodian agreements, U.S. Trust has
agreed to (i) maintain a separate account or accounts for each of the Funds;
(ii) make receipts and disbursements of money on behalf of the Funds; (iii)
collect and
-26-
<PAGE>
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 the Companies concerning the Funds'
operations. U.S. Trust is entitled to monthly fees for furnishing custodial
services according to the following fee schedule: on the face value of debt
securities and the market value of equities, a fee at the annual rate of .05%;
on issues held, $50.00 for each physical issue held, $25.00 for each book-
entry issue held, and 1/4 of 1% of market value for each foreign issue held;
on transactions, $25.00 for each physical transaction, $15.00 for each book-
entry transaction, and $50.00 for each foreign security transaction. In
addition, U.S. Trust is entitled to reimbursement for its out-of-pocket expenses
in connection with the above services.
U.S. Trust also serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust 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 the Companies
concerning the Funds' operations. For its transfer agency, dividend disbursing,
and subaccounting services, U.S. Trust is entitled to receive $15.00 per annum
per account and subaccount. In addition, U.S. Trust 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 may, at its own expense, open and maintain custody accounts
with respect to the Funds with other banks or trust companies, and may delegate
its transfer agency obligations to another transfer agent registered or
qualified under applicable law, provided that U.S. Trust shall remain liable for
the performance of all of its custodial and transfer agency duties under the
Custodian and Transfer Agency Agreements, notwithstanding any delegation.
Pursuant to this provision in the agreements, U.S. Trust has entered into a sub-
transfer agency arrangement with MFSC, an affiliate of U.S. Trust, with respect
to accounts of shareholders who are not Customers of U.S. Trust. For the
services provided by MFSC, U.S. Trust has agreed to pay MFSC $15.00 per annum
per account or subaccount plus out - of - pocket expenses. MFSC
receives no fee directly from the Companies for any of its sub-transfer agency
services.
-27-
<PAGE>
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Investment Adviser is responsible for, makes decisions with respect to and
places orders for all purchases and sales of 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 Funds' portfolio turnover rate 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' 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 markdown. 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
Investment Adviser provide that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment 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
Investment Adviser, to the extent permitted by law
-28-
<PAGE>
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 Investment 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 Investment 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 Investment Adviser and
does not reduce the investment advisory fee payable by the Funds. Such
information may be useful to the Investment 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 Investment Adviser
in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Distributor, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the Securities and Exchange Commission.
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 Investment 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 Investment 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 Investment 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
-29-
<PAGE>
under the 1940 Act) or their parents held by the Companies as of the close of
their most recent fiscal year. As of March 31, 1995 , the following
portfolios of Master Fund held the following securities of Master Fund's regular
brokers or dealers or their parents: (a) the Money Fund held the following
securities : repurchase agreement with Nomura Securities , Inc.
in the principal amount of $19,685,063, repurchase agreement with Fuji
Securities, Inc. in the principal amount of $20,000,000, commercial paper of
Merrill Lynch & Co., Inc. in the principal amount of $35,000,000 and commercial
paper of UBS Finance in the principal amount of $30,000,000; (b) the Government
Money Fund held the following securities: repurchase agreement with
Nomura Securities, Inc. in the principal amount of $20,216,462 and repurchase
agreement with Fuji Securities, Inc. in the principal amount of $20,000,000; (c)
the International Fund held the following security: 27,000 shares of
Nomura Securities Co., Ltd.; and (d) the Pacific/Asia Fund held the following
security: 26,000 shares of Nomura Securities Co., Ltd. Nomura Securities
International, Inc., Fuji Bank & Trust, Merrill Lynch, Pierce, Fenner & Smith,
Inc. and UBS Securities are considered to be regular brokers and dealers of
Master Fund. As of March 31, 1995 , Master Tax-Exempt Fund held no
securities of Master Tax-Exempt Fund's regular brokers or dealers and
their parents.
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
period ended March 31, 1995 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 (of which Mr. McConnel, Secretary of the
Companies, is a partner), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, is counsel to the Companies and
will pass upon the legality of the Shares offered by the Prospectuses.
ADDITIONAL INFORMATION CONCERNING TAXES
------------------------------------------
Generally
---------
The following supplements the tax information contained in the
Prospectus.
-30-
<PAGE>
Each of the Funds is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. If, for any reason, a Fund does not qualify
for a taxable year for the special Federal tax treatment afforded regulated
investment companies, such Fund would be subject to Federal tax on all of its
taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether or
not derived from interest on Municipal Securities) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.
A Fund will designate any distribution of the excess of net long-term
capital gain over net short-term capital loss as a capital gain dividend in a
written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Shareholders should note that, upon the sale or exchange
of Shares, if the shareholder has not held such Shares for at least six months,
any loss on the sale or exchange of those Shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the Shares.
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 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.
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."
Tax-Exempt Funds
----------------
As stated in their Prospectus, 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
-31-
<PAGE>
principal. Shares of the Tax-Exempt Funds would not be suitable for tax-exempt
institutions and may not be suitable 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 will be the same for all shareholders receiving dividends
from that Tax-Exempt Fund for such year.
A percentage of the interest on indebtedness incurred by a shareholder
to purchase or carry a Tax-Exempt Fund's Shares, equal to the percentage of the
total non-capital gain dividends distributed during the shareholder's taxable
year that is exempt - interest dividends, is not deductible for Federal income
tax purposes. In addition, 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
-32-
<PAGE>
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.
Taxation of Certain Financial Instruments
-----------------------------------------
Generally, futures contracts held by the Funds at the close of their
taxable year will be treated for Federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"marking-to-market. " Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss, without
regard to the length of time a Fund has held the futures contract (the "40%-60%
rule"). The amount of any capital gain or loss actually realized by a Fund in a
subsequent sale or other disposition of those futures contracts will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale of the contracts. With respect to
futures contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by a Fund, losses as to such contracts to sell will be subject to certain
loss deferral rules which limit the amount of loss currently deductible on
either part of the straddle to the amount thereof which exceeds the unrecognized
gain (if any) with respect to the other part of the straddle, and to certain
wash sales regulations. Under short sales rules, which also are applicable, the
holding period of the securities forming part of the straddle will (if they have
not been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for Federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales and loss deferral rules, and the requirement to capitalize
interest and carrying charges. Under temporary regulations, the Fund would be
allowed (in lieu of the foregoing) to elect either (1) to offset gains or losses
from positions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40%-60% rule
will apply to the net gain or loss attributable to the futures contracts, but in
the case of a
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mixed straddle account election, not more than 50 percent of any net gain may be
treated as long term and no more than 40 percent of any net loss may be treated
as short term. Options on futures contracts generally receive Federal tax
treatment similar to that described above.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "30% test"): (1) stock and
securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to the Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by the Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to forward contracts, futures
contracts, options on futures contracts, and other financial instruments subject
to the marking-to-market rules described above, the Internal Revenue Service has
ruled in private letter rulings that a gain realized from such a contract,
option or financial instrument will be treated as being derived from a security
held for three months or more (regardless of the actual period for which the
contract, option or instrument is held) if the gain arises as a result of a
constructive sale under the marking -to-market rules, and will be
treated as being derived from a security held for less than three months only if
the contract, option or instrument is terminated (or transferred) during the
taxable year (other than by reason of marking -to-market) and
less than three months have elapsed between the date the contract, option or
instrument is acquired and the termination date. Increases and decreases in the
value of a Fund's futures contracts and other investments that qualify as part
of a "designated hedge," as defined in Section 851(g) of the Code, may be netted
for purposes of determining whether the 30% test is met.
* * *
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
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are advised to consult their tax advisers concerning their specific situations
and the application of state and local taxes.
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
Securities and Exchange Commission 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.
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
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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). The Funds' maximum offering price per Share for purposes of the
formula will include the maximum sales load imposed by the Funds -- currently
4.50% of the per share offering price. Based on the foregoing calculations, the
effective yields for Shares of the IT Tax-Exempt, LT Tax-Exempt, Managed
Income, Short-Term Tax-Exempt, IT Income and ST Government Funds for the 30-day
period ended March 31, 1995 were
4.43%, 5.48%, 6.44%, 3.95%, 6.38% and 5.88%, respectively.
The "tax-equivalent" yield of the Short-Term 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 yield of the Short-Term
Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds for the 30-day period ended
March 31, 1995 were 5.72%, 6.42% and 7.94% ,
respectively.
Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end
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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 that advertises an "aggregate total return" computes such return
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 (reflecting any sales load charged
upon such reinvestment), (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. In
addition, the Funds' average annual total return and aggregate total return
quotations will reflect the deduction of the maximum sales load charged in
connection with the purchase of Shares.
Based on the foregoing calculations, the average annual total returns
for Shares of the Short-Term Tax-Exempt Fund, IT Tax-Exempt Fund, LT Tax-Exempt
Fund, ST Government Fund, IT Income Fund and Managed Income Fund for the one
year period ended March 31, 1995 were (1.21)%, 1.52%, 5.99%, (0.44)%, 0.26%
and (0.58)% , respectively. The average annual total returns for the IT Tax-
Exempt Fund, LT Tax-Exempt Fund and Managed Income Fund for the five year period
ended March 31, 1995 were 6.40%, 8.69% and 7.91% ,
respectively. The average annual total returns for the IT Tax-Exempt, LT Tax-
Exempt and Managed Income Funds for the periods from their commencement of
operations (December 3, 1985, February 5, 1986, and January 9, 1986,
respectively) to March 31, 1995 were 7.69%, 10.67% and
10.10% , respectively. The average annual total returns for the Short -
Term Tax-Exempt, IT Income and ST Government Funds for the
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-
<PAGE>
period from their commencement of operations (December 31, 1992) to March 31,
1995 were 1.32%, 2.00% and 1.51% , respectively.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in Shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. A Fund does
not, for these purposes, deduct from the initial value invested any amount
representing sales charges. A Fund will, however, disclose the maximum sales
charge and will also disclose that the performance data does not reflect sales
charges and that inclusion of sale charges would reduce the performance quoted.
The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Total return and yield data as reported in national
financial publications such as Money Magazine, Forbes, Barron's, The Wall Street
----- -------- ------ -------- --- ---- ------
Journal and The New York Times, or in publications of a local or regional
------- --- --- ---- -----
nature, may also be used in comparing the performance of a Fund.
Advertisements, sales literature or reports to shareholders may from time to
time also include a discussion and analysis of each Fund's performance,
including without limitation, those factors, strategies and technologies that
together with market conditions and events, materially affected each Fund's
performance.
The Funds may also from time to time include discussions or illustrations
of the effects of compounding in advertisements. "Compounding" refers to the
fact that, if dividends or other distributions of a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciations of a Fund would increase the value, not only of the
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<PAGE>
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 Investment
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.
MISCELLANEOUS
-------------
As used in the Prospectus, "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 11, 1995 U.S. Trust held of record substantially
all of the outstanding Shares in all Funds other than the Managed Income Fund,
where it held a majority of the
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<PAGE>
Shares, acting as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have discretion to vote or invest such
Shares.
As of July 11, 1995 , the name, address and percentage
ownership of each person, in addition to U.S. Trust, that beneficially owned 5%
or more of the outstanding Shares of the Short-Term Tax-Exempt Fund was
as follows: G.L. & J.E. Swenson , c/o United States Trust Company of
New York, 114 West 47th Street, New York, New York 10036, 7.2%.
FINANCIAL STATEMENTS
--------------------
The Companies' Annual Reports to Shareholders for the fiscal year
ended March 31, 1995 (the "Annual Reports") for the fixed income and
tax-exempt fixed income portfolios accompany this Statement of Additional
Information. The financial statements in the Annual Reports for the ST
Government, IT Income, Managed Income, Short-Term Tax-Exempt, IT Tax-Exempt and
LT Tax-Exempt Funds (the "Financial Statements") are incorporated in this
Statement of Additional Information by reference. The Financial Statements
included in the Annual Reports for the fiscal year ended March 31, 1995
have been audited by the Companies' independent auditors, Ernst &
Young LLP , whose reports thereon also appear in such Annual Reports and
are incorporated herein by reference. The Financial Statements in such Annual
Reports have been incorporated herein in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing. Additional
copies of the Annual Reports may be obtained at no charge by telephoning
MFSC 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
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A - 1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A- 1+. "
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A -
1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime - 1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning 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.
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<PAGE>
"Prime - 2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D- 2" and "D- 3."
Duff & Phelps employs three designations, "D- 1+," "D- 1" and
"D- 1-," within the highest rating category. The following summarizes
the rating categories used by Duff & Phelps for commercial paper:
"D- 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D- 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D- 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D- 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D- 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
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<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D- 4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D- 5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F- 1+. "
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
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interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers . The following summarizes
the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment 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 the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW -4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
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The following summarizes the ratings used by Standard &
Poor's for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely
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payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt
subordinated to senior debt which is assigned an actual or implied "CCC-" debt
rating. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default . This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments 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" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
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.
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"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 risks appear somewhat larger than in "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 considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
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The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
-48-
<PAGE>
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC, " "CC, " "C," "DDD," "DD," and "D" -Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business,
-49-
<PAGE>
economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson 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 represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
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 Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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<PAGE>
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"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 rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"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" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
-51-
<PAGE>
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
-52-
<PAGE>
UST MASTER TAX-EXEMPT FUNDS, INC.
New York Intermediate-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
August 1, 1995
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the New York Intermediate-Term
Tax-Exempt Fund (the "Fund"), an investment portfolio of UST Master Tax-Exempt
Funds, Inc. ("Master Tax-Exempt Fund") dated August 1, 1995 (the
"Prospectus"). Much of the information contained in this Statement of
Additional Information expands upon the subjects discussed in the Prospectus.
No investment in shares of the Fund ("Shares") should be made without reading
the Prospectus. A copy of the Prospectus may be obtained by writing Master Tax-
Exempt Fund c/o Mutual Funds Service Company, 73 Tremont Street, Boston, MA
02108-3915 or by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES .......................
Additional Information on Portfolio
Instruments ......................................
Risk Factors Relating to
New York Municipal Obligations ...................
Additional Investment Limitations ..................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ..........
INVESTOR PROGRAMS .......................................
Systematic Withdrawal Plan .........................
Exchange Privilege .................................
Other Investor Programs ............................
DESCRIPTION OF CAPITAL STOCK ............................
MANAGEMENT OF THE FUND ..................................
Directors and Officers .............................
Investment Advisory and Administration
Agreements .......................................
Service Organizations ..............................
Expenses ...........................................
Custodian and Transfer Agent........................
PORTFOLIO TRANSACTIONS ..................................
INDEPENDENT AUDITORS ....................................
COUNSEL .................................................
ADDITIONAL INFORMATION CONCERNING TAXES .................
Federal ............................................
Taxation of Certain Financial Instruments ..........
PERFORMANCE AND YIELD INFORMATION .......................
MISCELLANEOUS ...........................................
FINANCIAL STATEMENTS ....................................
APPENDIX A .............................................. A-1
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The investment objective of the Fund is to provide New York investors
with as high a level of current interest income 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 relative stability of principal. Under
normal market conditions, at least 80% of the Fund's assets will be invested in
Municipal Obligations (as defined in the Prospectus), and at least 65% of the
Fund's assets will be invested in New York Municipal Obligations (as defined in
the Prospectus). The following policies supplement the Fund's investment
objective and policies as set forth in the Prospectus.
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 general Federal income tax and not treated as a specific
tax preference item under the Federal alternative minimum tax.
The two principal classifications of Municipal Obli gations are
"general obligation" and "revenue" issues, but the Fund's portfolio may also
include "moral obligation" issues, which are normally issued by special-purpose
authorities. 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 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 Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's Ratings Group ("S&P") described in the Prospectus and 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
-1-
<PAGE>
rate with different ratings may have the same yield. Subsequent to its purchase
by the 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 the
Fund. United States Trust Company of New York, the Fund's investment adviser
("U.S. Trust" or the "Investment 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 Fund 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 and the Fund's Prospectus. 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 facil ities, 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. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Obligations. For example, under the Tax Reform Act of
1986, as amended, interest on certain private activity bonds must be included in
an investor's alternative minimum taxable income, and corporate investors must
treat all tax-exempt interest as an item
-2-
<PAGE>
of tax preference. Master Tax-Exempt Fund cannot, of course, predict what
legislation may be proposed in the future regarding the income tax status of
interest on Municipal Obligations, or which proposals, if any, might be enacted.
Such proposals, while pending or if enacted, might materially adversely affect
the availability of Municipal Obligations for investment by the Fund and the
liquidity and value of its portfolio. In such an event, the Fund would
reevaluate its investment objective and policies and consider possible changes
in its structure or possible dissolution.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
its Investment Adviser will review the proceedings relating to the issuance of
Municipal Obligations or the basis for such opinions.
Money Market Instruments
------------------------
Certificates of deposit acquired by the Fund within the limits set
forth in the Prospectus will be those of (i) domestic branches of U.S. banks
which are members of the Federal Reserve System or are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"), or (ii)
savings and loan associations which are insured by the Savings Association
Insurance Fund of the FDIC. (The foregoing limitation does not preclude the Fund
from acquiring Municipal Obligations which are backed by letters of credit
issued by foreign banks.)
Tax-exempt commercial paper purchased by the Fund will consist of
issues rated at the time of purchase "A-2" or higher by S&P or "Prime-2" or
better by Moody's or, if not rated, determined to be of comparable quality by
the Investment Adviser. These rating symbols are described in Appendix A
hereto.
Insured Municipal Obligations
-----------------------------
The Fund 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 as described in the Prospectus. Although insurance coverage for the
Municipal Obligations 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
-3-
<PAGE>
than 25% of its net assets in Municipal Obligations covered by insurance
policies.
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by the Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on securities underlying the repurchase agreement). Securities subject to
repurchase agreements are held by the Fund's custodian (or sub-custodian) or in
the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered loans by the Fund under the Investment Company Act of 1940 (the "1940
Act").
When-Issued and Forward Transactions
------------------------------------
When the 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 the 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 the Fund will set aside cash or liquid assets
to satisfy its purchase commitments in the manner described, the Fund's
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.
The 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, the 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 the 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.
-4-
<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 the 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 Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held by it. Under a "stand-by commitment," a dealer or bank agrees
to purchase from the Fund, at the Fund's option, specified Municipal Obligations
at a specified price. The amount payable to the 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 the 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 Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the 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 the 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 Fund intends to enter into "stand-by commitments" only with banks
and broker/dealers which, in the Investment Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Investment Adviser will review periodically the issuer's
assets, liabilities, contingent claims and other relevant financial information.
-5-
<PAGE>
Futures Contracts
-----------------
The Fund may invest in interest rate futures contracts and municipal
bond index futures contracts. Futures contracts will not be entered into for
speculative purposes, but to hedge risks associated with the Fund's securities
investments. 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, the 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.
Successful use of futures by the Fund is also subject to the
Investment Adviser's ability to correctly predict movements in the direction of
the market. For example, if the 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
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sale of securities
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
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
-6-
<PAGE>
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 the 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.
Miscellaneous
-------------
The Fund may not invest in oil, gas, or mineral leases.
Risk Factors Relating to New York Municipal Obligations
-------------------------------------------------------
Some of the significant financial considerations relating to the
Fund's investment in New York Municipal Obligations are summarized below. This
summary information is not intended to be a complete description and is
principally derived from official statements relating to issues of New York
Municipal Obligations 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.
-7-
<PAGE>
State Economy. New York is the third most populous state 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 has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. New York City (the "City"), which is the most populous city
in the State and nation and is the center of the nation's largest metropolitan
area, accounts for a large portion of the State's population and personal
income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position. The recession has
been more severe in the State, owing to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. There can be no assurance that the State economy will not
experience worse-than-predicted results in the 1995-96 fiscal year, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
The unemployment rate in the State dipped below the national rate in
the second half of 1981 and remained lower until 1991. It stood at 6.9% in 1994.
The total employment growth rate in the State has been below the national
average since 1984 and is expected to slow to less than 0.5% in 1995. State per
capita personal income remains above the national average. State per capita
income for 1994 was estimated at $25,999, which is 19.2% above the 1994
estimated national average of $21,809. During the past ten years, total personal
income in the State rose slightly faster than the national average only in 1986
through 1989.
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.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months
-8-
<PAGE>
after the start of the fiscal year. Prior to adoption of the budget, the
Legislature enacted appropriations for disbursements considered to be necessary
for State operations and other purposes, including all necessary appropriations
for debt service. The State financial plan for the 1995-96 fiscal year was
formulated on June 20, 1995 and is based upon the State's budget as enacted by
the Legislature and signed into law by the Governor (the "1995-96 State
Financial Plan").
The 1995-96 State Financial Plan is the first to be enacted in the
administration of the Governor, who assumed office on January 1. It is the first
budget in over half a century which proposed and, as enacted, projects an
absolute year-over-year decline in disbursements in the General Fund, the
State's principal operating fund. Spending for State operations is projected to
drop even more sharply, by 4.6%. Nominal spending from all State spending
sources (i.e., excluding Federal aid) is proposed to increase by only 2.5% from
----
the prior fiscal year, in contrast to the prior decade when such spending growth
averaged more than 6.0% annually.
In his executive budget, the Governor indicated that in the 1995-96
fiscal year, the state financial plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts to
spur economic growth and provide relief for low and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap is projected to be closed in the 1995-96 State Financial Plan
through a series of actions, mainly spending reductions and cost containment
measures and certain reestimates that are expected to be recurring, but also
through the use of one-time solutions. The 1995-96 State Financial Plan projects
(i) nearly $1.6 billion in savings from cost containment, disbursement
reestimates, and other savings in social welfare programs, including Medicaid,
income maintenance and various child and family care programs; (ii) $2.2 billion
in savings from State agency actions to reduce spending on the State workforce,
SUNY and CUNY, mental hygiene programs, capital projects, the prison system and
fringe benefits; (iii) $300 million in savings from local assistance reforms,
including actions affecting school aid and revenue sharing while proposing
program legislation to provide relief from certain mandates that increase local
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spending; (iv) over $400 million in revenue measures, primarily through a new
Quick Draw Lottery game, changes to tax payments schedules, and the sale of
assets; and (v) $300 million from reestimates in receipts.
The 1995-96 State Financial Plan includes actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The
Division of the Budget estimates that the 1995-96 State Financial Plan contains
actions that provide nonrecurring resources or savings totalling approximately
$900 million while the State comptroller (the "Comptroller") believes that such
amount exceeds $1 billion. In addition to this use of nonrecurring resources,
the 1995-96 State Financial Plan reflects actions that will directly affect the
State's 1996-97 fiscal year baseline receipts and disbursements. The three-year
plan to reduce State personal income taxes will decrease State tax receipts by
an estimated $1.7 billion in State fiscal year 1996-97 in addition to the amount
of reduction in State fiscal year 1995-96. Further significant reductions in the
personal income tax are scheduled for the 1997-98 State fiscal year. Other tax
reductions enacted in 1994 and 1995 are estimated to cause an additional
reduction in receipts of over $500 million in 1996-97, as compared to the level
of receipts in 1995-96. Similarly, many actions taken to reduce disbursements in
the State's 1995-96 fiscal year are expected to provide greater reductions in
the State's fiscal year 1996-97. These include actions to reduce the State
workforce, reduce Medicaid and welfare expenditures and slow community mental
hygiene program development.
The Division of the Budget and the Comptroller expect that the net
impact of these and other factors will produce a potential imbalance in receipts
and disbursements in fiscal year 1996-97. The Governor has indicated that in the
1996-97 executive budget he will propose to close this potential imbalance
primarily through General Fund expenditure reductions and without increases in
taxes or deferrals of scheduled tax reductions.
The 1995-96 State Financial Plan is based on a number of assumptions
and projections. Because it is not possible to predict accurately the occurrence
of all factors that may affect the 1995-96 State Financial Plan, actual results
could differ materially and adversely from projections made at the outset of a
fiscal year. There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years.
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Recent Financial Results. The General Fund is the principal operating fund of
------------------------
the State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund and
receives almost all State taxes and other resources not dedicated to particular
purposes.
The General Fund is projected to be balanced on a cash basis for the
1995-96 fiscal year. Total receipts and transfers from other funds are projected
to be $33.110 billion, a decrease of $48 million from total receipts in the
prior fiscal year. Total General Fund disbursements and transfers to other funds
are projected to be $33.055 billion, a decrease of $344 million from the total
amount disbursed in the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1993 included a 1991-92 accumulated
deficit in its combined governmental funds of $681 million. Liabilities totalled
$12.864 billion and assets of $12.183 billion were available to liquidate these
liabilities.
The State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of tax
and revenue anticipation notes. The national recession and then the lingering
economic slowdown in the New York and regional economy, resulted in repeated
shortfall in receipts and three budget deficits. For its 1992-93, 1993-94 and
1994-95 fiscal years, however, the State recorded balanced budgets on a cash
basis, with substantial fund balances in 1992-93 and 1993-94, and a smaller fund
balance in 1994-95.
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
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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 payments. The State has also
entered into a contractual-obligation financing arrangement with the Local
Government Assistance Corporation ("LGAC") in an effort to restructure the way
the State makes certain local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue
long-term obligations to fund certain payments to local governments
traditionally funded through New York State's annual seasonal borrowing. The
legislation empowered LGAC to issue its bonds and notes in an amount not in
excess of $4.7 billion (exclusive of certain refunding bonds) plus certain other
amounts. Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent State sales and use
tax to pay debt service on these bonds. The legislation also imposed a cap on
the annual seasonal borrowing of the State at $4.7 billion, less net proceeds
of bonds issued by LGAC and bonds issued to provide for capitalized interest,
except in cases where the Governor and the legislative leaders have certified
the need for additional borrowing and provided a schedule for reducing it to the
cap. If borrowing above the cap is thus permitted in any fiscal year, it is
required by law to be reduced to the cap by the fourth fiscal year after the
limit was first exceeded. As of June 1995, LGAC had issued its bonds to provide
net proceeds of $4.7 billion, completing the program. The impact of LGAC's
borrowing is that the State is able to meet its cash flow needs in the first
quarter of the fiscal year without relying on short-term seasonal borrowings.
The 1995-96 State Financial Plan includes no spring
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borrowing nor did the 1994-95 State Financial Plan, which was the first time in
35 years there was no short-term seasonal borrowing.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State funds dedicated for transportation purposes), and not
by the full faith and credit of the State. In addition, the proposed amendment
would (i) permit multiple purpose general obligation bond proposals to be
proposed on the same ballot, (ii) require that State debt be incurred only for
capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment can be presented to the
voters for their consideration, it must be passed by a separately elected
legislature. The amendment must therefore be passed by the newly elected
Legislature in 1995 prior to presentation to the voters in November 1995. The
amendment was passed by the Senate in June 1995, and the Assembly is expected to
pass the amendment shortly.
On January 13, 1992, Standard & Poor's Corporation ("Standard &
Poor's") 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. Standard & Poor's also
continued its negative rating outlook assessment on State general obligation
debt. On April 26, 1993, Standard & Poor's revised the rating outlook
assessment to stable. On February 14, 1994, Standard & Poor's raised its
outlook to positive and, on February 28, 1994, confirmed its A- rating. On
January 6, 1992, Moody's Investors Service, Inc. ("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.
The State anticipates that its capital programs will be financed, in
part, by State and public authorities borrowings in 1995-96. The State expects
to issue $248 million in general obligation bonds (including $170 million for
purposes of redeeming outstanding bond anticipation notes) and $186 million in
general obligation commercial paper. The Legislature has also authorized the
issuance of up to $33 million in certificates of participation during the
State's 1995-96 fiscal year for
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equipment purchases and $14 million for capital purposes. These projections are
subject to change if circumstances require.
Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes and on tax and revenue anticipation
notes were $793.3 million for the 1994-95 fiscal year, and are estimated to be
$774.4 million for the 1995-96 fiscal year. These figures do not include
interest payable on State General Obligation Refunding Bonds issued in July 1992
("Refunding Bonds") to the extent that such interest was paid from an escrow
fund established with the proceeds of such Refunding Bonds. Principal and
interest payments on fixed rate and variable rate bonds issued by LGAC were
$239.4 million for the 1994-95 fiscal year, and are estimated to be $328.2
million for 1995-96. State lease-purchase rental and contractual obligation
payments for 1994-95, including State installment payments relating to
certificates of participation, were $1.607 billion and are estimated to be
$1.641 billion in 1995-96.
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 against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (5) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (6) challenges by
commercial insurers, employee welfare benefit plans, and health maintenance
organizations to the imposition of 13%, 11% and 9% surcharges on inpatient
hospital bills and a bad debt and charity care allowance on all hospital bills
and hospital bills paid by such entities; (7) challenges to certain aspects
of petroleum business taxes, and (8) action alleging damages resulting from the
failure by the State's Department of Environmental Conservation to timely
provide certain data.
A number of cases have also been instituted against the State
challenging the constitutionality of various public authority financing
programs.
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In a proceeding commenced on August 6, 1991 (Schulz, et al. v. State
-----------------------
of New York, et al., Supreme Court, Albany County), petitioners challenge the
-------------------
constitutionality of two bonding programs of the New York State Thruway
Authority authorized by Chapters 166 and 410 of the Laws of 1991. In addition,
petitioners challenge the fiscal year 1991-92 judiciary budget as having been
enacted in violation of Sections 1 and 2 of Article VII of the State
Constitution. The defendants' motion to dismiss the action on procedural grounds
was denied by order of the Supreme Court dated January 2, 1992. By order dated
November 5, 1992, the Appellate Division, Third Department, reversed the order
of the Supreme Court and granted defendants' motion to dismiss on grounds of
standing and mootness. By order dated September 16, 1993, on motion to
reconsider, the Appellate Division, Third Department, ruled that plaintiffs have
standing to challenge the bonding program authorized by Chapter 166 of the laws
of 1991. The proceeding is presently pending in Supreme Court, Albany County.
In Schulz, et al. v. State of New York, et al., commenced May 24,
-------------------------------------------
1993, Supreme Court, Albany County, petitioners challenge, among other things,
the constitutionality of, and seek to enjoin, certain highway, bridge and mass
transportation bonding programs of the New York State Thruway Authority and the
Metropolitan Transportation Authority authorized by Chapter 56 of the Laws of
1993. Petitioners contend that the application of State tax receipts held in
dedicated transportation funds to pay debt service on bonds of the Thruway
Authority and of the Metropolitan Transportation Authority violates Sections 8
and 11 of Article VII and Section 5 of Article X of the State Constitution and
due process provisions of the State and Federal Constitutions. By order dated
July 27, 1993, the Supreme Court granted defendants' motions for summary
judgment, dismissed the complaint, and vacated the temporary restraining order
previously issued. By decision dated October 21, 1993, the Appellate Division,
Third Department, affirmed the judgment of the Supreme Court. On June 30, 1994,
the Court of Appeals unanimously affirmed the rulings of the trail court and the
Appellate Division in favor of the State.
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 has developed a plan to restore the State's retirement systems to
prior funding levels. Such funding is expected to exceed prior levels by $30
million in fiscal 1994-95, $63 million in fiscal 1995-96, $116 million in fiscal
1996-97, $193 million in fiscal 1997-98, peaking at $241 million in fiscal
1998-99. Beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required
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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 is
required to make aggregate payments of $351.4 million, of which $90.3 million
have been made. 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.
The legal proceedings noted above involve State finances, State
programs and miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State.
Adverse developments in these proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1995-96 State
Financial Plan. An adverse decision in any of these proceedings could exceed
the amount of the 1995-96 State Financial Plan reserve for the payment of
judgments and, therefore, could affect the ability of the State to maintain a
balanced 1995-96 State Financial Plan. In its audited financial statements for
the fiscal year ended March 31, 1994, the State reported its estimated
liability for awarded and anticipated unfavorable judgments to be $675 million.
Although other litigation is pending against New York State, except as
described above, 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.
Authorities. The fiscal stability of New York State is related, in part, to the
-----------
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that are
State-supported or State-related. As of September 30, 1994, date of the latest
data available, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $70.3 billion. As of March 31, 1995
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aggregate public authority debt outstanding as State-supported debt was $27.9
billion and as State-related debt was $36.1 billion.
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 18 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.
New York City and Other Localities. The fiscal health of the State of New York
----------------------------------
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
City has achieved balanced operating results for each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP.
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 public credit markets. The City was not able to sell short-term
notes to the public again until 1979.
In 1975, Standard & Poor's 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 Standard & Poor's. On July 2, 1985,
Standard & Poor's revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 2, 1993, Standard & Poor's reconfirmed its A-
rating of City bonds, continued its negative rating outlook assessment and
stated that maintenance of such rating depended upon the City's making further
progress towards reducing budget gaps in the outlying years. 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 July 10, 1995,
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Standard & Poor's downgraded its rating on the City's $23 billion of outstanding
general obligation bonds to "BBB+" from "A-", citing to the City's chronic
structural budget problems and weak economic outlook. Standard & Poor's stated
that New York City's reliance on one-time revenue measures to close annual
budget gaps, a dependence on unrealized labor savings, overly optimistic
estimates of revenues and state and federal aid and the City's continued high
debt levels also contributed to its decision to lower the rating.
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. 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
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. Under its
enabling legislation, MAC's authority to issue bonds and notes (other than
refunding bonds and notes) expired on December 31, 1984. Legislation has been
passed by the legislature which would, under certain conditions, permit MAC to
issue up to $1.465 billion of additional bonds, which are not subject to a
moral obligation provision.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of
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approval are suspended, but the Board continues to have oversight
responsibilities.
The staffs of OSDC, the Control Board and the City comptroller issue
periodic reports on the City's financial plans, as modified, analyzing forecasts
of revenues and expenditures, cash flow, and debt service requirements, as well
as compliance with the financial plan, as modified, by the City and its Covered
Organizations (i.e., those which receive or may receive monies from the City
directly, indirectly or contingently). OSDC staff reports issued during the
mid-1980's noted that the City's budgets benefited from a rapid rise in the
City's economy, which boosted the City's collection of property, business and
income taxes. These resources were used to increase the City's workforce and
the scope of discretionary and mandated City services. Subsequent OSDC staff
reports examined the 1987 stock market crash and the 1989-92 recession, which
affected the City's region more severely than the nation, and attributed an
erosion of City revenues and increasing strain on City expenditures to that
recession. According to a recent OSDC staff report, the City's economy was slow
to recover from the recession and is expected to experience a weak employment
situation, and moderate wage and income growth, during the 1995-96 period.
Also, reports of OSDC, the Control Board and the City comptroller have variously
indicated that many of the City's balanced budgets have been accomplished, in
part, through the use of non-recurring resources, tax and fee increases,
personnel reduction and additional State assistance; that the City has not yet
brought its long-term expenditures in line with recurring revenues; that the
City's proposed gap-closing programs, if implemented, would narrow future budget
gaps; that these programs tend to rely heavily on actions outside the direct
control of the City; and that the City is therefore likely to continue to face
future projected budget gaps requiring the City to increase revenues and/or
reduce expenditures. According to the most recent staff reports of OSDC, the
Control Board and the comptroller, during the four-year period covered by the
current financial plan, the City is relying on obtaining substantial resources
from initiatives needing approval and cooperation of its municipal labor unions,
Covered Organizations and city council, as well as the state and federal
governments, among others, and there can be no assurance that such approval can
be obtained.
On February 14, 1995, the Mayor released the preliminary budget for
the City's 1996 fiscal year, which addressed a projected $2.7 billion budget
gap. Most of the gap-closing initiatives may be implemented only with the
cooperation of the City's municipal unions, or the State or federal governments.
New York City officials estimated that the final State budget, enacted
by the Legislature on June 7, 1995, would result
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in a $670 million shortfall from the $1.1 billion in additional state aid the
Mayor had sought in order to close the City's projected deficit. The City may
have to take drastic actions to balance its budget in the wake of such
shortfall.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If expected federal or State aid is not
forthcoming, if unforeseen developments in the economy significantly reduce
revenues derived from economically sensitive taxes or necessitate increased
expenditures for public assistance, if the City should negotiate wage increases
for its employees greater than the amounts provided for in the City's financial
plan or if other uncertainties materialize that reduce expected revenues or
increase projected expenditures, then, to avoid operating deficits, the City may
be required to implement additional actions, including increases in taxes and
reductions in essential City services. The City might also seek additional
assistance from New York State.
The City requires certain amounts of financing for seasonal and
capital spending purposes. The City has issued $1.75 billion of notes for
seasonal financing purposes during fiscal year 1994. The City's capital
financing program projected long-term financing requirements of approximately
$17 billion for the City's fiscal years 1995 through 1998. The major capital
requirements include expenditures for the City's water supply and sewage
disposal systems, roads, bridges, mass transit, schools, hospitals and housing.
In addition to financing for new purposes, the City and the New York City
Municipal Water Finance Authority have issued refunding bonds totalling $1.8
billion in fiscal year 1994.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities is not included in
the projections of the State's receipts and disbursements in the State's
1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1993, the
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total indebtedness of all localities in New York State other than New York City
was approximately $17.7 billion. A small portion (approximately $105 million)
of that indebtedness represented borrowing to finance budgetary deficits and
was issued pursuant to enabling New York State legislation. State law requires
the comptroller to review and make recommendations concerning the budgets of
those local government units other than New York City authorized by State law to
issue debt to finance deficits during the period that such deficit financing is
outstanding. FIfteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1993.
From time to time, 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 New York State, New York 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 New York 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
New York State assistance in the future.
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3. 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 Fund's investment objective, policies, and limitations may be deemed to
be underwriting;
4. Purchase or sell real estate, except that the Fund may invest in
Municipal Obligations secured by real estate or interests therein;
5. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Fund may
enter into futures contracts and futures options;
6. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that the Fund may enter into futures contracts and futures
options;
7. 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; and
8. 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; provided that the Fund may enter into futures
contracts and futures options.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors, and
the Distributor has agreed to use appropriate efforts to solicit all purchase
orders. As described in the Prospectus, Shares may be sold to customers
("Customers") of the Investment Adviser, its affiliates and correspondent banks
and qualified banks, savings and loan associations, broker/dealers, and other
institutions ("Shareholder Organizations") that have entered into servicing
agreements with the Company. Shares are also sold directly to institutional
investors ("Institutional Investors") and members of the general public ("Direct
Investors", and collectively with Institutional Investors, "Investors").
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
-22-
<PAGE>
amounts in excess of a minimum balance agreed to by the Shareholder Organization
and its Customer. Investors purchasing Shares may include officers, directors,
or employees of the particular Shareholder Organization.
Shares of the Fund are offered for sale with a maximum sales charge of
4.50%. An illustration of the computation of the offering price per share of
the Fund, using the value of the Fund's net assets and number of outstanding
securities at the close of business on March 31, 1995 is as follows:
<TABLE>
<CAPTION>
New York Intermediate -
Term Tax-Exempt Fund
-----------------------
<S> <C>
Net Assets.................. $ 87,163,531
Outstanding Shares.......... 10,578,215
Net Asset Value Per Share... $ 8.24
Sales Charge (4.50% of the
offering price)............. $ .39
Offering to Public.......... $ 8.63
</TABLE>
As stated in the Prospectus, the sales load described above will not
be applicable to: (a) purchases of Shares by customers of the Investment
Adviser or its affiliates; (b) trust, agency or custodial accounts opened
through the trust department of a bank, trust company or thrift institution,
provided that appropriate notification of such status is given at the time of
investment; (c) companies, corporations and partnerships (excluding full service
broker/dealers and financial planners, registered investment advisers and
depository institutions not covered by the exemptions in (d) and (e) below); (d)
financial planners and registered investment advisers not affiliated with or
clearing purchases through full service broker/dealers; (e) purchases of Shares
by depository institutions for their own account as principal; (f) exchange
transactions (described below under "Investor Programs -- Exchange Privilege")
where the Shares being exchanged were acquired in connection with the
distribution of assets held in a trust, agency or custodial account maintained
with the trust department of a bank; (g) corporate/business retirement plans
(such as 401(k), 403(b)(7), 457 and Keogh accounts) sponsored by the Distributor
and IRA accounts sponsored by the Investment Adviser; (h) company-sponsored
employee pension or retirement plans making direct investments in the Fund; (i)
purchases of Shares by officers, trustees, directors, employees, former
employees and retirees of Master Tax-Exempt Fund, UST Master Funds, Inc.
("Master Fund"), the Investment Adviser, the Distributor or of any direct or
indirect affiliate of either of them; (j) purchases of Shares by
-23-
<PAGE>
all beneficial shareholders of the Master Tax-Exempt Fund or Master Fund as of
May 22, 1989; (k) purchases of Shares by investment advisers registered under
the Investment Advisers Act of 1940 for their customers through an omnibus
account established with United States Trust Company of New York; (l) purchases
of Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Tax-Exempt Fund or Master
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investment Limited Partnership; and (n) customers of
certain financial institutions who purchase shares through a registered
representative of UST Financial Services, Corp. on the premises of their
financial institutions. In addition, no sales load is charged on the
reinvestment of dividends or distributions or in connection with certain share
exchange transactions. Investors who have previously redeemed shares in a
portfolio of Master Fund or Master Tax-Exempt Fund on which a sales load has
been paid also have a one-time privilege of purchasing shares of another
portfolio of either company at net asset value without a sales charge, provided
--------
that such privilege will apply only to purchases made within 30 calendar days
from the date of redemption and only with respect to the amount of the
redemption.
Total sales charges paid by shareholders of the New York Intermediate-
Term Tax-Exempt Fund for the fiscal years ended March 31, 1995, 1994 and 1993
were $0, $2,243 and $3,048, respectively. Of these amounts, UST
Distributors, Inc., the Fund's former Distributor, retained $0, $1,750 and
$915, respectively. The balance was paid to selling dealers.
Master Tax-Exempt Fund 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 New York Stock Exchange (the "Exchange") is restricted by
applicable rules and regulations of the Securities and Exchange Commission; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the Securities and Exchange Commission has by order permitted such
suspension; or (d) an emergency exists as determined by the Securities and
Exchange Commission.
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 price of
the Fund's portfolio securities.
Under limited circumstances, Master Tax-Exempt Fund may 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 will
-24-
<PAGE>
be limited to other securities (except for municipal debt securities issued by
state political subdivisions or their agencies or instrumentalities) that: (a)
meet the investment objective and policies of any Fund acquiring such
securities; (b) are acquired for investment and not for resale; (c) are liquid
securities that are not restricted as to transfer either by law or liquidity of
market; and (d) have a value that is readily ascertainable (and not established
only by evaluation procedures) as evidenced by a listing on the American Stock
Exchange, New York Stock Exchange or NASDAQ, or as evidenced by their status as
U.S. Government securities, bank certificates of deposit, banker's acceptances,
corporate and other debt securities that are actively traded, money market
securities and other similar securities with a readily ascertainable value.
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 Mutual Funds Service
Company, the Fund's sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares. 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 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 the Fund while at the
same time participating in the Systematic Withdrawal Plan with respect to an
account in the Fund.
-25-
<PAGE>
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of the same series of any
other portfolio of Master Fund or Master Tax-Exempt Fund (collectively, the
"Companies"). 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. In order to prevent abuse of this privilege to the disadvantage
of other shareholders, the companies reserve the right to limit the number of
exchange requests of Investors and Customers of Shareholder Organizations to no
more than six per year. The Companies may modify or terminate the exchange
program at any time upon 60 days' written notice to shareholders, and may reject
any exchange request.
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 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.
Other Investor Programs
-----------------------
As described in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Master Tax-Exempt Fund's Charter authorizes its Board of Directors to
issue up to 14 billion full and fractional shares of capital stock and to
classify or reclassify any unissued shares of Master Tax-Exempt Fund 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. The
-26-
<PAGE>
Prospectus describes the classes of shares into which Master Tax-Exempt Fund's
authorized capital is currently classified.
Shares have no preemptive rights and only such con version 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 the Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to the Fund and a proportionate dis tribution, based upon the relative
asset values of Master Tax-Exempt Fund's portfolios, of any general assets of
Master Tax-Exempt Fund not belonging to any particular portfolio of Master Tax-
Exempt Fund which are available for distribution. In the event of a liquidation
or dissolution of Master Tax-Exempt Fund, its shareholders will be entitled to
the same distribution process.
Shareholders of Master Tax-Exempt Fund 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 outstanding shares of Master Tax-Exempt Fund may elect all of Master Tax-
Exempt Fund'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 Master Tax-Exempt Fund 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, the approval of principal underwriting contracts, and the election
of directors may be effectively acted upon by shareholders of Master Tax-Exempt
Fund voting without regard to class.
Master Tax-Exempt Fund's Charter authorizes its Board of Directors,
without shareholder approval (unless otherwise required by applicable law), to
(a) sell and convey the assets of
-27-
<PAGE>
the 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 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 the 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 the Fund with the assets belonging to another
portfolio of Master Tax-Exempt Fund, 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 to be redeemed
at their net asset value or converted into shares of another class of Master
Tax-Exempt Fund's capital 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 Fund's
shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of Master Tax-Exempt Fund's Common Stock (or of the Shares of the 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 Master Tax-
Exempt Fund's Charter, Master Tax-Exempt Fund may take or authorize such action
upon the favorable vote of the holders of more than 50% of the outstanding
Common Stock of Master Tax-Exempt Fund voting without regard to class.
-28-
<PAGE>
MANAGEMENT OF THE FUND
----------------------
Directors and Officers
----------------------
The directors and executive officers of Master Tax-Exempt Fund, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
Position with Principal Occupation
Master Tax- During Past 5 Years and
Name and Address Exempt Fund Other Affiliations
---------------- ------------- -----------------------
<S> <C> <C>
Alfred C. Tannachion/1/ Chairman of the Retired.
1135 Hyde Park Court Board, President
Mahwah, NJ 07430 and Treasurer
Age 69
Donald L. Campbell Director Retired; Senior Vice
333 East 69th Street President, Royal Insurance
Apt. 10-H Company, Inc., until
New York, NY 10021 August, 1989; Director,
Age 69 Royal Life Insurance Co. of
N.Y.
Joseph H. Dugan Director Retired; President, CEO and
913 Franklin Lake Road Director, L.B. Foster
Franklin Lakes, NJ 07417 Company (tubular products),
Age 70 from September, 1987 until
May, 1990; Executive Vice
President and COO, L.B.
Foster Company, from
September, 1986 until
September, 1987; Senior
Vice President--Finance,
Chief Financial Officer and
Director, Todd Shipyards
Corporation, prior to
January 3, 1986.
</TABLE>
____________________
1. This director is considered to be an "interested person" of Master Fund as
defined in the 1940 Act.
-29-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Master Tax- During Past 5 Years and
Name and Address Exempt Fund Other Affiliations
---------------- ------------- -----------------------
<S> <C> <C>
Wolfe J. Frankl Director Director, Deutsche Bank
40 Gooseneck Lane Financial, Inc.; Director,
Charlottesville, VA 22903 The Harbus Corporation;
Age 74 Trustee, Marine Funds
Trust; Managing Director--
North America, Berlin
Economic Development Corp.,
prior to 1988.
Robert A. Robinson Director President Emeritus, The
Church Pension Fund Church Pension Fund and its
800 Second Avenue affiliated companies, since
New York, NY 10017 1968; Trustee, Mariner
Age 69 Funds Trust; 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;
Director, Morehouse
Publishing Co.
W. Bruce McConnel, III Secretary Partner of the law firm of
1345 Chestnut Street Drinker Biddle & Reath
Philadelphia, PA 19107-
3496
Age 52
Frank M. Deutchki Assistant Vice President, Mutual
Mutual Funds Service Co. Secretary Funds Service Company since
73 Tremont Street February, 1989; Senior Vice
Boston, MA 02108-3913 President--Risk Analysis
Age 41 and Avoidance, Putnam
Investor Services (mutual
fund group), from October,
1987 to January, 1989.
John M. Corcoran Assistant Assistant Vice President,
Mutual Funds Service Co. Treasurer Manager of Administration,
73 Tremont Street Mutual Funds Service
Boston, MA 02108-3913 Company, since October,
Age 30 1993; Audit Manager, Ernst
& Young, from August, 1987
to September, 1993.
</TABLE>
Each director of Master Tax-Exempt Fund receives an annual fee of
$9,000 plus a meeting fee of $1,500 for each meeting attended and is reimbursed
for expenses incurred in attending meetings. The Chairman of the Board is
entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to Master Tax-Exempt Fund. The employees of Mutual Funds
Service Company do not receive any compensation from Master Tax-Exempt Fund for
acting
-30-
<PAGE>
as officers of Master Tax-Exempt Fund. No person who is currently an officer,
director or employee of the Investment Adviser serves as an officer, director or
employee of Master Tax-Exempt Fund. The directors and officers of Master Tax-
Exempt Fund as a group own less than 1% of the Shares of the Fund.
The following chart provides certain information about the fees
received by Master Tax-Exempt Fund's directors in the most recently completed
fiscal year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from Master Tax-Exempt Fund
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position Master Tax-Exempt Fund Expenses to Directors
--------------- ---------------------- ---------- ------------------------------
<S> <C> <C> <C>
Alfred C. Tannachion $20,000 None $40,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $15,000 None $30,000
Director
Joseph H. Dugan $15,000 None $30,000
Director
Wolfe J. Frankl $15,000 None $30,000
Director
Robert A. Robinson
Director $15,000 None $30,000
</TABLE>
---------------------------
* The "Fund Complex" consists of UST Master Funds, Inc., UST Master Tax-
Exempt Funds, Inc. and UST Master Variable Series, Inc. For the fiscal year
ended March 31, 1995, UST Master Variable Series, Inc. did not pay any
directors' fees.
Investment Advisory and Administration Agreements
-------------------------------------------------
United States Trust Company of New York serves as Investment Adviser
to the Fund. In the Investment Advisory Agreement, U.S. Trust has agreed to
provide the services described in the Prospectus. The Investment Adviser has
also agreed to pay all expenses incurred by it in connection with its activities
under the agreement other than the cost of securities, including brokerage
commissions, if any, purchased for the Fund. For the fiscal years ended March
31, 1993, 1994 and 1995, Master Tax-Exempt Fund paid the Investment Adviser
$350,352, $505,148 and $449,781, respectively, with respect to the Fund. For the
fiscal years ended March 31, 1995 and 1994, the
-31-
<PAGE>
Investment Adviser waived fees totalling $17,901 and $1,351 with respect to
the Fund.
The Investment Advisory Agreement provides that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of this agreement,
except 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 on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder. In addition, the Investment 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.
Mutual Funds Service Company ("MFSC") and Concord Holding Corporation
(the "Administrators") jointly served as the Fund's administrators until July
31, 1995. Under the Administration Agreement, the Administrators have agreed to
maintain office facilities for the Fund, furnish the Fund with statistical and
research data, clerical, accounting and bookkeeping services, and certain other
services required by the Fund, and to compute the net asset value, net income,
"exempt interest dividends" and realized capital gains or losses of the Fund.
The Administrators prepare semiannual reports to the Securities and Exchange
Commission, 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 Fund's financial accounts and
records, and generally assist in all aspects of the Fund's operations.
Effective August 1, 1995, administrative services will be provided by
MFSC and Federated Administrative Services, an affiliate of the Distributor,
under an administration agreement having substantially the same terms as the
Administration Agreements currently in effect. For the fiscal years ended March
31, 1993, 1994 and 1995, Master Tax-Exempt Fund paid the Administrators
$109,520, $156,257 and $144,024, respectively in the aggregate with respect to
the Fund. For the fiscal year ended March 31, 1995 the Administrators waived
fees totalling $22 in the aggregate with respect to the Fund.
Service Organizations
---------------------
As stated in the Prospectus, Master Tax-Exempt Fund will enter into
agreements with Service Organizations. Such shareholder servicing agreements
will require the Service Organizations to provide shareholder administrative
services to
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<PAGE>
their Customers who beneficially own Shares in consideration for the Fund's
payment (on an annualized basis) of up to .40% of the average daily net assets
of the Fund's Shares beneficially owned by Customers of the Service
Organization. Such services may include: (a) assisting Customers in
designating and changing dividend options, account designations and addresses;
(b) providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records, as may reasonably be requested from
time to time by Master Tax-Exempt Fund; (c) assisting in processing purchases,
exchange and redemption transactions; (d) arranging for the wiring of funds; (e)
transmitting and receiving funds in connection with Customer orders to purchase,
exchange or redeem Shares; (f) verifying and guaranteeing Customer signatures in
connection with redemption orders, transfers among and changes in Customer-
designated accounts; (g) providing periodic statements showing a Customer's
account balances and, to the extent practicable, integrating of such information
with information concerning other client transactions otherwise effected with or
through the Service Organization; (h) furnishing on behalf of Master Tax-Exempt
Fund's distributor (either separately or on an integrated basis with other
reports sent to a Customer by the Service Organization) periodic statements and
confirmations of all purchases, exchanges and redemptions of Shares in a
Customer's account required by applicable federal or state law; (i) transmitting
proxy statements, annual reports, updating prospectuses and other communications
from Master Tax-Exempt Fund to Customers; (j) receiving, tabulating and
transmitting to Master Tax-Exempt Fund proxies executed by Customers with
respect to annual and special meetings of shareholders of Master Tax-Exempt
Fund; (k) providing reports (at least monthly, but more frequently if so
requested by Master Tax-Exempt Fund's distributor) containing state-by-state
listings of the principal residences of the beneficial owners of the Shares; and
(l) providing or arranging for the provision of such other related services as
Master Tax-Exempt Fund or a Customer may reasonably request.
Master Tax-Exempt Fund's agreements with Service Organizations are
governed by an Administrative Services Plan (the "Plan") adopted by Master Tax-
Exempt Fund. Pursuant to the Plan, Master Tax-Exempt Fund's Board of Directors
will review, at least quarterly, a written report of the amounts expended under
Master Tax-Exempt Fund's agreements with Service Organizations and the purposes
for which the expenditures were made. In addition, the arrangements with
Service Organizations will be approved annually by a majority of Master Tax-
Exempt Fund's directors, including a majority of the directors who are not
"interested persons" of Master Tax-Exempt Fund as defined in the 1940 Act and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
-33-
<PAGE>
Any material amendment to Master Tax-Exempt Fund's arrangements with
Service Organizations must be approved by a majority of the Board of Directors
(including a majority of the Disinterested Directors). So long as Master Tax-
Exempt Fund's arrangements with Service Organizations are in effect, the
selection and nomination of the members of Master Tax-Exempt Fund's Board of
Directors who are not "interested persons" (as defined in the 1940 Act) of
Master Tax-Exempt Fund will be committed to the discretion of such non-
interested Directors.
For the fiscal year ended March 31, 1995 and 1994, payments to Service
Organizations totalled $17,323 and $1,351 with respect to the New York
Intermediate-Term Tax-Exempt Fund, all of which $17,458 and $1,351 was paid to
affiliates of U.S. Trust.
Expenses
--------
Except as otherwise noted, the Investment Adviser and the
Administrators will bear all expenses in connection with the performance of
their advisory and administrative services. The Fund will bear the expenses
incurred in its operations. Such expenses include taxes; interest; fees,
including the Fund's portion of the fees paid to Master Tax-Exempt Fund's
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 services; costs of shareholder reports and meetings; and any
extraordinary expenses. The Fund also pays for any brokerage fees and
commissions in connection with the purchase of portfolio securities.
If the expenses borne by the Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Investment
Adviser and the Administrators will reimburse the Fund for a portion of any such
excess to the extent required by such regulations in proportion to the fees
received by them in such year up to the amount of the fees payable to them,
provided, however, to the extent required by such state regulations, the
Investment Adviser and the Administrators have agreed to effect such
reimbursement regardless of the fees payable to them. The amounts of the above
reimbursements, if any, will be estimated, reconciled and paid on a monthly
basis. To Master Tax-Exempt Fund's knowledge, of the applicable expense
limitations in effect on the date of this Statement of Additional Information,
none is more restrictive than the following: 2 1/2% of the first $30 million of
average annual net assets, 2% of the
-34-
<PAGE>
next $70 million of average annual net assets and 1/2% of average annual net
assets in excess of $100 million.
Custodian and Transfer Agent
----------------------------
United States Trust Company of New York also serves as custodian of
the Fund's assets. Under the custodian agreement, U.S. Trust has agreed to (i)
maintain a separate account or accounts in the name of the Fund; (ii) make
receipts and disbursements of money on behalf of the Fund; (iii) collect and
receive all income and other payments and distributions on account of the Fund's
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 Master Tax-Exempt Fund's Board of
Directors concerning the Fund's operations. U.S. Trust is entitled to monthly
fees for furnishing custodial services according to the following fee schedule:
on the face value of debt securities and the market value of equity securities,
a fee at the annual rate of .05%; on issues held, $50.00 for each physical issue
held, $25.00 for each book-entry issue held and 1/4 of 1% of market value for
each foreign issue held; on transactions, $25.00 for each physical transaction,
$15.00 for each book-entry transaction and $50.00 for each foreign security
transaction. In addition, U.S. Trust is entitled to reimbursement for its
out-of-pocket expenses in connection with the above services.
U.S. Trust also serves as the Fund's transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust has agreed to (i) issue and
redeem Shares; (ii) address and mail all communications by the Fund to its
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 Master Tax-Exempt Fund
concerning the Fund's operations. For its transfer agency, dividend disbursing,
and subaccounting services, U.S. Trust is entitled to receive $15.00 per annum
per account and subaccount. In addition, U.S. Trust 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 may, at its own expense, open and maintain custody accounts
with respect to the Fund with other banks or trust companies, and may delegate
its transfer agency obligations to another transfer agent registered or
qualified under applicable law, provided that U.S. Trust shall remain liable for
the performance of all of its custodial and transfer agency duties under the
Custodian and Transfer Agency Agreement, notwithstanding any delegation.
Pursuant to this provision in the agreement, U.S. Trust has entered into a
sub-transfer agency arrangement with MFSC, an affiliate of U.S. Trust, with
respect to accounts of shareholders who are not Customers of U.S. Trust. For
the services provided by MFSC, U.S. Trust has agreed to pay MFSC $15.00 per
annum per account or subaccount plus out-of-pocket expenses. MFSC receives no
fee directly from Master Tax-Exempt Fund for any of its sub-transfer agency
services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of Master Tax-Exempt Fund's Board of
Directors, the Investment Adviser is responsible for, makes decisions with
respect to, and places orders for all purchases and sales of portfolio
securities.
The Fund may engage in short-term trading to achieve its investment
objective. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Fund's turnover rate may be
higher than that of many other investment companies with similar investment
objectives and policies. The Fund's portfolio turnover rate may also be
affected by cash requirements for redemptions of Shares and by regulatory
provisions which enable the Fund to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Fund's prospectus for the Fund's portfolio
turnover rates.
Securities purchased and sold by the Fund 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 Fund, 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 Agreement provides that, in executing
portfolio transactions and selecting brokers or dealers, the Investment Adviser
will seek to obtain the best net price and the most favorable execution. The
Investment 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 Master Tax-Exempt Fund, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
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<PAGE>
In addition, the Investment Advisory Agreement authorizes the
Investment Adviser, to the extent permitted by law and subject to the review of
Master Tax-Exempt Fund's Board of Directors from time to time with respect to
the extent and continuation of the policy, to cause the 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 Investment 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 Investment 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 fixed-income 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 Investment Adviser and
does not reduce the investment advisory fee payable by the Fund. Such
information may be useful to the Investment Adviser in serving the Fund and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Fund.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, Distributor, or any affiliated person of either of them (as
such term is defined in the 1940 Act) acting as principal, except to the extent
permitted by the Securities and Exchange Commission.
Investment decisions for the Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the 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 Investment 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 Fund
or the size of the position obtained by the Fund. To the extent permitted by
law, the Investment Adviser may aggregate the securities to be sold or purchased
for the Fund with those to be sold or purchased for
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<PAGE>
other investment companies or common trust funds in order to obtain best
execution.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Master Tax-Exempt Fund. The Fund's Financial
Highlights included in the Prospectus and the financial statements for the
period ended March 31, 1995 incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
included in their report thereon which appears therein.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of Master
Tax-Exempt Fund, is a partner), Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107-3496, is counsel to Master
Tax-Exempt Fund and will pass upon the legality of the Shares offered by the
Prospectus.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Federal
-------
The following supplements the tax information contained in the
Prospectus.
The Fund is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and has qualified and intends to
continue to qualify as a regulated investment company. If, for any reason, the
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 the Fund's current and accumulated earnings and profits and would be eligible
for the dividends received deduction in the case of corporate shareholders.
As stated in the Prospectus, the Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Fund will not be suitable for tax-exempt institutions
and may not
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<PAGE>
be suitable 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 Fund's dividends being tax-exempt, but such dividends would be
ultimately taxable to the beneficiaries when distributed to them. In addition,
the Fund 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 the Fund to pay exempt-interest dividends for any taxable
year, at least 50% of the aggregate value of the 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 Fund will notify its
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by the Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code received
by the 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 the Fund with respect to any taxable year which qualifies as exempt-
interest dividends will be the same for all shareholders receiving dividends
from the Fund for such year.
A percentage of the interest on indebtedness incurred by a shareholder
to purchase or carry the Shares, equal to the percentage of the total non-
capital gain dividends distributed during the shareholder's taxable year that is
exempt-interest dividends, is not deductible for income tax purposes. In
addition, if a shareholder holds 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
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<PAGE>
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.
Any net long-term capital gains realized by the Fund will be
distributed at least annually. The Fund will generally have no tax liability
with respect to such gains and the distributions will be taxable to shareholders
as long-term capital gains, regardless of how long a shareholder has held
Shares. Such distributions will be designated as a capital gain dividend in a
written notice mailed by the Fund to shareholders not later than 60 days after
the close of the Fund's taxable year.
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 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 Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or 31% of 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."
Taxation of Certain Financial Instruments
-----------------------------------------
Generally, futures contracts held by the Fund at the close of the
Fund's taxable year will be treated for Federal income tax purposes as sold for
their fair market value on the last business day of such year, a process known
as "marking-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss, without
regard to the length of time the Fund has held the futures contract (the "40%-
60% rule"). The amount of any capital gain or loss actually realized by the Fund
in a subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by the Fund in a
prior year as a result of the
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<PAGE>
constructive sale of the contracts. With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by the Fund,
losses as to such contracts to sell will be subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they have
not been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, the Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for Federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, and loss deferral rules and the requirement to capitalize interest
and carrying charges. Under temporary regulations, the Fund would be allowed
(in lieu of the foregoing) to elect either (1) to offset gains or losses from
positions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40%-60% rule
will apply to the net gain or loss attributable to the futures contracts, but in
the case of a mixed straddle account election, not more than 50 percent of any
net gain may be treated as long-term and no more than 40 percent of any net loss
may be treated as short-term. Options on futures contracts generally receive
Federal tax treatment similar to that described above.
The Fund will not be treated as a regulated investment company under
the Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "30% test"): (1) stock and
securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to the Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by the Fund upon maturity or disposition of a security
held for less than three months will
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<PAGE>
not be treated as gross income derived from the sale or other disposition of
such security within the meaning of this requirement. However, any other income
which is attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose. With
respect to futures contracts, forward contracts, options on futures contracts,
and other financial instruments subject to the marking-to-market rules described
above, the Internal Revenue Service has ruled in private letter rulings that a
gain realized from such a contract, option, or financial instrument will be
treated as being derived from a security held for three months or more
(regardless of the actual period for which the contract, option or instrument is
held) if the gain arises as a result of a constructive sale under the marking-
to-market rules, and will be treated as being derived from a security held for
less than three months only if the contract, option or instrument is terminated
(or transferred) during the taxable year (other than by reason of marking-to-
market) and less than three months have elapsed between the date the contract,
option or instrument is acquired and the termination date. Increases and
decreases in the value of the Fund's futures contracts and other investments
that qualify as part of a "designated hedge," as defined in Section 851(g) of
the Code, may be netted for purposes of determining whether the 30% test is met.
* * *
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 and local taxes.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
The Fund may advertise the standardized effective 30-day (or one
month) yields calculated in accordance with the method prescribed by the SEC for
mutual funds. Such yield will be calculated separately for each Fund according
to the following formula:
a-b
Yield = 2 [(----- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
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<PAGE>
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 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. The
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 the 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). The Fund's maximum offering price per Share for purposes of the
formula will include the maximum sales load imposed by the Fund -- currently
4.50% of the per share offering price. Based on the foregoing calculations, the
Fund's standardized effective yield for the 30-day period ended March 31, 1995
was 4.14%.
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<PAGE>
The "tax-equivalent" yield of the 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%.
Based on the foregoing calculation, the tax-equivalent yield of the
Fund for the 30-day period ended March 31, 1995 was 6.00%.
The Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV
T = [(-----) (to the 1/n power) - 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.
The calculation is 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 (reflecting any sales load charged upon
such reinvestment), (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. In
addition, the Fund's average annual total return and aggregate total return
quotations will reflect the deduction of the maximum sales load charged in
connection with the purchase of Shares. The Fund's average annual total return
for Shares for the period
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<PAGE>
from commencement of operations (May 31, 1990) to March 31, 1995 for the one
year period ended March 31, 1995 were 5.60% and 1.35%, respectively.
The Fund 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 the Fund's performance with other measures of investment return. For
example, in comparing the 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, the 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 Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. The Fund will, however, disclose the maximum sales charge and will
also disclose that the performance data does not reflect sales charges and that
inclusion of sale charges would reduce the performance quoted.
The total return and yield of the 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 the 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 the
Fund. Advertisements, sales literature or reports to shareholders may from time
to time also include a discussion and analysis of the Fund's performance,
including without limitation, those factors, strategies and technologies that
together with market conditions and events, materially affected the Fund's
performance.
The Fund 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 the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciations of the Fund would increase the value, not only
of
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<PAGE>
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 Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of the 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 the Fund), as well as the views of the Investment
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 the Fund. The Fund 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 the
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 the Fund. Such advertisements or communicators may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging 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 Master Tax-Exempt Fund not belonging to a particular portfolio of
Master Tax-Exempt Fund. In determining the net asset value of the Fund's Shares,
assets belonging to the Fund allocable to Shares are charged with the direct
liabilities of the Fund allocable to Shares and with a share of the general
liabilities of Master Tax-Exempt Fund which are normally allocated in proportion
to the relative asset values of Master Tax-Exempt Fund's portfolios at the time
of allocation. Subject to the provisions of Master Tax-Exempt Fund'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 the
Fund, are conclusive.
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<PAGE>
As of May __, 1995, U.S. Trust held of record substantially all of
the outstanding Shares of the Fund as agent or custodian for its customers, but
did not own such Shares beneficially because it did not have discretion to vote
or invest such Shares.
FINANCIAL STATEMENTS
--------------------
Master Tax-Exempt Fund's Annual Report to Shareholders for the fiscal
year ended March 31, 1995 (the "Annual Report") for the tax-exempt fixed
income portfolios accompanies this Statement of Additional Information. The
financial statements for the New York Intermediate-Term Tax-Exempt Fund in the
Annual Report (the "Financial Statements") are incorporated in this Statement of
Additional Information by reference. The Financial Statements included in the
Annual Report for the fiscal year ended March 31, 1995 have been audited by
Master Tax-Exempt Fund's independent auditors, Ernst & Young LLP, whose report
thereon also appears in such Report and is incorporated herein by reference.
The Financial Statements in such Annual Report have been incorporated herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. Additional copies of the Annual Report may be obtained
at no charge by telephoning the Distributor at the telephone number appearing on
the front page of this Statement of Additional Information.
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<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
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.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used by
Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
A-3
<PAGE>
interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment 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 the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments 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" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
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
A-6
<PAGE>
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 risks appear somewhat larger than in "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 considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that
A-7
<PAGE>
the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in
A-9
<PAGE>
business, economic or financial conditions may increase investment risk albeit
not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson 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 represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
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.
A-10
<PAGE>
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"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 rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"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" - Loans bearing this designation are of the best
quality, enjoying strong protection by established
A-11
<PAGE>
cash flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
USE MASTER TAX-EXEMPT FUNDS, INC.
FORM N-1A
---------
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
(1) Included in Part A:
Financial Highlights for the Registrant's Short-Term
Tax-Exempt Fund for the period from May 24, 1985
(commencement of operations) to March 31, 1986 and for
the fiscal years ended March 31, 1987 through March 31,
1995, Intermediate-Term Tax-Exempt Fund for the period
from December 3, 1985 (commencement of operations) to
March 31, 1986 and for the fiscal years ended March 31,
1987 through March 31, 1995, Long-Term Tax-Exempt Fund
for the period from February 5, 1986 (commencement of
operations) to March 31, 1986 and for the fiscal years
ended March 31, 1987 through March 31, 1995, New York
Intermediate-Term Tax-Exempt Fund for the period from
May 31, 1990 (commencement of operations) to March 31,
1991 and for the fiscal years ended March 31, 1992
through March 31, 1995, Short-Term Tax Exempt
Securities Fund for the period from December 28, 1992
(commencement of operations) to March 31, 1993 and for
the fiscal years ended March 31, 1994 and March 31,
1995.
(2) Included in Part B:
The Registrant's March 31, 1995 Annual Report to
Shareholders has been filed with the Commission and the
financial statements included therein are incorporated
herein by reference.
<PAGE>
(b) Exhibits:
---------
(1) (a) Articles of Incorporation of Registrant dated
August 7, 1984 (1).
(b) Articles Supplementary of Registrant dated
April 27, 1990 (10).
(c) Articles Supplementary of Registrant
concerning the increase of authorized capital stock. (14)
(2) (a) Bylaws of Registrant (1).
(b) Amendment No. 1 to Bylaws of Registrant. (4)
(3) None.
(4) (a) Specimen copy of share certificate for Class
A Common Stock of Registrant (2).
(b) Specimen copy of share certificate for Class
B Common Stock of Registrant (2).
(c) Specimen copy of share certificate for Class
C Common Stock of Registrant (2).
(d) Specimen copy of share certificates for
Class A Common Stock - Special Series 1 of Registrant (6).
(e) Specimen copy of share certificate for Class
B Common Stock - Special Series 1 of Registrant (6).
(f) Specimen copy of share certificate for Class
C Common Stock - Special Series 1 of Registrant (6).
(g) Specimen copy of share certificate for Class
D Common Stock of Registrant (9).
(h) Specimen copy of share certificate for Class
D Common Stock - Special Series 1 of Registrant (9).
(i) Specimen copy of share certificate for Class
E Common Stock of Registrant (9).
(j) Specimen copy of share certificate for Class
E Common Stock - Special Series 1 of Registrant (9).
(k) Specimen copy of share certificate for Class
F Common Stock of Registrant (13).
(l) Specimen copy of share certificate for Class
F Common Stock - Special Series 1 of Registrant (13).
(5) (a) Investment Advisory Agreement between
Registrant and United States Trust Company of New York ("U.S.
Trust") dated February 6, 1985 (3).
-2-
<PAGE>
(b) Amendment No. 1 to Investment Advisory
Agreement between Registrant and U.S. Trust dated February
6, 1985 (8).
(c) Investment Advisory Agreement between
Registrant and U.S. Trust dated May 11, 1990 with respect to
the California Intermediate-Term Tax-Exempt Fund and New
York Intermediate-Term Tax-Exempt Fund (10).
(d) Amendment No. 1 to Investment Advisory
Agreement between Registrant and U.S. Trust dated May 11,
1990 with respect to the Short-Term Tax-Exempt Securities
Fund (15).
(6) Form of Distribution Agreement between Registrant
and Edgewood Services, Inc.
(7) None.
(8) (a) Custody and Transfer Agency Agreement between
Registrant and U.S. Trust, dated February 6, 1985, amended
as of January 30, 1987 (5).
(b) Amendment No. 2 to Custody and Transfer
Agency Agreement with respect to the Short-Term Tax-Exempt
Securities Fund (15).
(9) (a) Form of Administration Agreement among
Registrant, UST Master Funds, Inc., and Mutual Funds Service
Company and Federated Administrative Services.
(b) Form of Amended and Restated Administrative
Services Plan and related Shareholder Servicing Agreement
(16)
*(10) Opinion of counsel that shares are validly issued,
fully paid and non-assessable.
(11) (a) Consent of Ernst & Young LLP.
(b) Consent of Drinker Biddle & Reath.
(12) None.
(13) Purchase Agreement between Registrant and Shearson
Lehman Brothers Inc. dated February 6, 1985 (3).
(14) None.
(15) Form of Amended and Restated Distribution Plan and
Form of Restated Distribution Agreement.
--------------------
*Filed pursuant to Rule 24f-2 as part of Registrant's
Rule 24f-2 Notice.
-3-
<PAGE>
(16) (a) Schedule for computation of performance
quotation (11).
(16) (b) Schedule for computation of performance
quotation (15).
(27) (a) Financial Data Schedule as of March 31, 1995
for the Short-Term Tax-Exempt Fund.
(27) (b) Financial Data Schedule as of March 31, 1995
for the Intermediate-Term Tax-Exempt Fund.
(27) (c) Financial Data Schedule as of March 31, 1995
for the Long-Term Tax-Exempt Fund.
(27) (d) Financial Data Schedule as of March 31, 1995
for the New York Intermediate-Term Tax-Exempt Fund.
(27) (e) Financial Data Schedule as of March 31, 1995
for the Short-Term Tax-Exempt Securities Fund.
(1) Incorporated by reference to Registrant's Registration
Statement on Form N-1A filed August 31, 1984.
(2) Incorporated by reference to Registrant's Pre-Effective
Amendment No. 2 to its Registration Statement on Form
N-1A filed February 14, 1985.
(3) Incorporated by reference to Registrant's Post-Effective
Amendment No. 1 to its Registration Statement on Form
N-1A filed October 30, 1985.
(4) Incorporated by reference to Registrant's Post-Effective
Amendment No. 2 to its Registration Statement on Form
N-1A filed June 6, 1986.
(5) Incorporated by reference to Registrant's Post-Effective
Amendment No. 3 to its Registration Statement on Form
N-1A filed July 30, 1987.
(6) Incorporated by reference to Registrant's Post-Effective
Amendment No. 5 to its Registration Statement on Form
N-1A filed November 1, 1988.
(7) Incorporated by reference to Registrant's Post-Effective
Amendment No. 6 to its Registration Statement on Form
N-1A filed June 2, 1989.
(8) Incorporated by reference to Registrant's and UST
Master Funds, Inc.'s ("Master Fund") joint
Post-Effective Amendments Nos. 9 and 7, respectively,
to their Registration Statements on Form N-1A filed
March 12, 1990.
(9) Incorporated by reference to Registrant's and Master
Fund's joint Post-Effective Amendments Nos. 10 and 8,
respectively, to their Registration Statements on Form
N-1A filed July 27, 1990.
(10) Incorporated by reference to Registrant's and Master
Fund's joint Post-Effective Amendments Nos. 11 and 9,
respectively, to their Registration Statements on Form
N-1A filed December 7, 1990.
(11) Incorporated by reference to Registrant's and Master
Fund's joint Post-Effective Amendments Nos. 12 and 10,
respectively, to their Registration Statements on Form
N-1A filed May 31, 1991.
(12) Incorporated by reference to Registrant's and Master
Fund's joint Post-Effective Amendments Nos. 13 and 11,
respectively, to their Registrant Statements on Form
N-1A filed August 1, 1991.
(13) Incorporated by reference to Registrant's Post-Effective
Amendment No. 13 to its Registration Statement on Form
N-1A filed October 29, 1992.
(14) Incorporated by reference to Registrant's Post-Effective
Amendment No. 14 to its Registration Statement on Form
N-1A filed December 24, 1992.
(15) Incorporated by reference to Registrant's Post-Effective
Amendment No. 15 to its Registration Statement on Form
N-1A filed August 2, 1993.
(16) Incorporated by reference to Registrant's Post-Effective
Amendment No. 16 to its Registration Statement on Form
N-1A filed December 27, 1993.
-4-
<PAGE>
Item 25. Persons Controlled By or Under
Common Control with Registrant
------------------------------
Registrant is controlled by its Board of Directors.
Item 26. Number of Holders of Securities
-------------------------------
The following information is as of May 19, 1995
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A Common Stock 3,252
Class B Common Stock 1,131
Class C Common Stock 601
Class D Common Stock 419
Class E Common Stock 0
Class F Common Stock 230
</TABLE>
ITEM 27. Indemnification
---------------
Article VII, Section 3 of Registrant's Articles of Incorporation,
incorporated by reference as Exhibit (1)(a) hereto, and Article VI, Sectioin 2
of Registrant's Bylaws, incorporated by reference as Exhibit (2)(a) hereto,
provide for the indemnification of Registrant's directors and officers.
Indemnification of Registrant's principal underwriter, custodian, and transfer
agent is provided for, respectively, in Section 1.11 of the Distribution
Agreement filed herewith as Exhibit (6) hereto and Sections 26 and 27
of the Custody and Transfer Agency Agreement, incorporated by reference as
Exhibit (8) hereto. Registrant has obtained frmo a major insurance carrier a
directors' and officers' liability policy covering certain types of errors and
omissions. In no event will Registrant indemnify any of its directors, officers,
employees, or agents against any liability to which such person would otherwise
be subject by reason of his willful misfeasance, bad faith, gross negligence in
the performance of his duties, or by reason of his reckless disregard of the
duties involved in the conduct of his office or arising under his agreement with
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release No. 11330 under the Investment Company Act of 1940 in
connection with any indemnification.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
-5-
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
(a) United States Trust Company of New York.
United States Trust Company of New York ("U.S. Trust") is a
full-service state-chartered bank located in New York, New York. Set forth
below are the names and principal businesses of the trustees and certain
senior executive officers of U.S. Trust, including those who are engaged
in any other business, profession, vocation, or employment of a substantial
nature.
Position
with U.S. Principal Type of
Trust Name Occupation Business
--------- ---- ---------- --------
Trustee/ Samuel C. Butler Partner in Cravath, Law Firm
Director Cravath, Swaine Swaine & Moore
& Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Trustee/ Peter O. Crisp General Partner
Director Venrock Associates in Venrock Associates
Room 5600
30 Rockefeller Plaza
New York, NY 10112
Trustee/ Antonia M. Grumbach Partner in Patter- Law Firm
Director Patterson, Belknap, son, Belknap, Webb
Webb & Tyler & Tyler
30 Rockefeller Plaza
New York, NY 10112
Trustee/ H. Marshall Schwarz Chairman of the Bank
Director, United States Trust Board & Chief Exe-
Chairman of Co. of New York cutive Officer of
the Board and 114 West 47th Street U.S. Trust Corp. and
Chief Execu- New York, NY 10036 U.S. Trust Company of
tive Officer N.Y.
Trustee/ Philippe de Montebello Director of the Art Museum
Director Metropolitan Museum of Metropolitan
Art Museum of Art
1000 Fifth Avenue
New York, NY 10028-0198
Trustee/ Paul W. Douglas
Director 250 Park Avenue
Room 1900
New York, NY 10177
Trustee/ Frederic C. Hamilton Chairman of the Oil & Gas
Director Hamilton Oil Corp. Board of Hamilton exploration
1560 Broadway Oil Corp.
Suite 2000
Denver, CO 80202
-6-
<PAGE>
Position
with U.S. Principal Type of
Trust Name Occupation Business
--------- ---- ---------- --------
Trustee/ John H. Stookey
Director Hanson Industries
410 Park Avenue
New York, NY 10028
Trustee/ Robert N. Wilson Vice Chairman of
Director Johnson & Johnson the Board of Johnson
One Johnson & John- & Johnson
son Plaza
New Brunswick, NJ 08933
Trustee/ Peter L. Malkin Chairman of
Director Wein, Malkin & Bettex Wein, Malkin & Bettex
Lincoln Building
60 East 42nd Street
New York, NY 10165
Trustee/ Richard F. Tucker Retired
Director 11 Over Rock Lane
Westport, CT 06880
Trustee/ Carroll L. Wainright, Consulting Partner Law Firm
Director Jr. of Milbank, Tweed,
Milbank, Tweed, Hadley Hadley & McCloy
& McCloy
One Chase Manhattan Plaza
New York, NY 10005
Trustee/ Frederick S. Wonham Vice Chairman of Bank
Director and United States Trust the Board of U.S.
Vice Chair- Company of New York Trust Corporation
man 114 West 47th Street and United States
New York, NY 10036 Trust Company of
New York
Trustee/ Donald M. Roberts Vice Chairman of Bank
Director, United States Trust the Board and
Vice Chair- Company of New York Treasurer of U.S.
man and 114 West 47th Street Trust Corporation
Treasurer New York, NY 10036 and United States
Trust Company of
New York
Trustee/ Frederick B. Taylor Vice Chairman and Bank
Director, United States Trust Chief Investment Of-
Vice Chair- Company of New York ficer of U.S. Trust
man and 114 West 47th Street Corporation and United
Chief Invest- New York, NY 10036 States Trust Company
ment Officer of New York
Trustee/ Jeffrey S. Maurer President of U.S. Bank
Director and United States Trust Trust Corporation and
President Company of New York United States Trust
114 West 47th Street Company of New York
New York, NY 10036
-7-
<PAGE>
Position
with U.S. Principal Type of
Trust Name Occupation Business
--------- --- ---------- --------
Trustee/ Daniel P. Davison Chairman, Christie, Fine Art
Director Christie, Manson Manson & Woods Auctioneer
& Woods International, International, Inc.
Inc.
502 Park Avenue
New York, NY 10021
Trustee/ Orson D. Munn Chairman and Investment
Director Munn, Bernhard & Director of Munn, Advisory
Associates, Inc. Bernard & Asso- Firm
6 East 43rd Street ciates, Inc.
28th Floor
New York, NY 10017
Trustee/ Philip L. Smith Corporate Director and
Director P.O. Box 386 Trustee
Ponte Verde Beach, FL 32004
Trustee/ Edwin D. Etherington President, Emeritus, Education
Director P.O. Box 100 Wesleyan University
Old Lyme, CT 06371 and Former President
of American Stock Exchange
Item 29. Principal Underwriter
---------------------
(a) Edgewood Services, Inc. (the "Distributor") currently serves as
distributor for Registrant and acts as principal underwriter or distributor for
UST Master Funds, Inc.
<TABLE>
<CAPTION>
Positions and
(b) Names and Principal Positions and Offices with Offices with
Business Addresses UST Distributors, Inc. Registrant
------------------ ---------------------- -------------
<S> <C> <C>
James J. Dolan Trustee and President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Senior Vice President and --
Federated Investors Tower Trustee, Edgewood Services,
Pittsburgh, PA 15222-3779 Inc.
Douglas L. Hein Trustee, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Frank E. Polefrone Trustee, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Newton Heston, III Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Charles H. Field Assistant Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Jeannette Fisher-Garber Assistant Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Kenneth W. Pegher, Jr. Treasurer, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
</TABLE>
(c) Not Applicable.
Item 30. Location of Accounts and Records
--------------------------------
(1) United States Trust Company of New York, 114 W. 47th Street, New
York, NY 10036 (records relating to its functions as investment adviser,
custodian and transfer agent).
(2) Edgewood Services, Inc., Federated Investors Tower, Pittsburgh, PA
15222-3779 (records relating to its function as distributor).
(3) Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts
02108-3913; Federated Administrative Services, Federated Investors Tower,
Pittsburgh, PA 15222-3779.
-8-
<PAGE>
(records relating to their functions as administrators and sub-transfer agent).
(4) Drinker Biddle & Reath, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107-3496 (Registrants' Articles
of Incorporation, Bylaws, and Minute Books).
Item 31. Management Services
-------------------
Inapplicable.
Item 32. Undertakings
------------
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest available Annual Report to
Shareholders which includes Management's Discussion of Registrant's
performance, upon request and without charge.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, UST Master Tax-Exempt Funds, Inc. certifies that
it meets all of the requirements for effectiveness for this Post-Effective
Amendment No. 18 to its Registration Statement ("Amendment No. 18") pursuant to
Rule 485(b) under the 1933 Act and has duly caused this Amendment No. 18, to its
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mahwah and the State of
New Jersey, on the 31st day of July, 1995.
UST MASTER TAX-EXEMPT FUNDS, INC.
Registrant
/s/ Alfred Tannachion
----------------------------
Alfred Tannachion, President
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 18 to UST Master Tax-Exempt Funds, Inc.
Registration Statement on Form N-1A has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alfred Tannachion
----------------------
Alfred Tannachion Chairman of the July 31, 1995
Board, President
and Treasurer
/s/ Joseph H. Dugan
-------------------
Joseph H. Dugan Director July 31, 1995
/s/ Donald L. Campbell
----------------------
Donald L. Campbell Director July 31, 1995
/s/ Wolfe J. Frankl
-------------------
Wolfe J. Frankl Director July 31, 1995
/s/ Robert Robinson
-------------------
Robert Robinson Director July 31, 1995
</TABLE>
-10-
<PAGE>
<TABLE>
EXHIBIT INDEX
------------
Exhibit No. Description Page No.
----------- ----------- -------
<S> <C> <C>
(6)(a) Form of Distribution
Agreement between
Registrant and
Edgewood Services
Inc.
(9)(a) Form of Adminstration
Agreement between
Registrant, UST Master
Funds, Inc., Mature
Funds Service Company
and Federated Administrative
Services
(9)(b) Form of Amended and
Restated Administrative
Services Plan and related
Shareholder Servicing
Agreement.
(11)(a) Consent of Ernst & Young LLP.
(b) Consent of Drinker Biddle & Reath.
(15) Form of Amended and Restated
Distribution Plan and form of
related Distribution Agreement.
(27)(a) Financial Data Schedule as of
March 31, 1995 for the
Short-Term Tax-Exempt Fund.
(b) Financial Data Schedule as of
March 31, 1995 for the
Intermediate-Term Tax-Exempt Fund.
(c) Financial Data Schedule as of
March 31, 1995 for the Long-Term
Tax-Exempt Fund.
(d) Financial Data Schedule as of
March 31, 1995 for the New York
Intermediate-Term Tax-Exempt Fund.
(e) Financial Data Schedule as of
March 31, 1995 for the Short-Term
Tax-Exempt Securities Fund.
</TABLE>
<PAGE>
FORM OF DISTRIBUTION CONTRACT
Edgewood Services, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Gentlemen:
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned, UST Master Tax-Exempt Funds, Inc. (the
"Company"), a Maryland corporation, has agreed that Edgewood Services, Inc. (the
"Distributor"), a subsidiary of Federated Investors ("Federated"), shall be, for
the period of this Contract, a distributor of shares (the "Shares") of the
Company's Common Stock of one or more classes and series representing interests
in the Company's investment portfolios (individually, a "Fund," collectively,
"Funds"), as described and set forth on one or more exhibits to this Contract.
In the event that the Company establishes one or more additional investment
portfolios other than the Funds with respect to which it decides to retain the
Distributor to act as a distributor hereunder, the Company shall so notify the
Distributor in writing. If the Distributor is willing to render such services
to a new investment portfolio, it will notify the Company in writing whereupon
such investment portfolio will become a Fund under this Contract.
1. Services as Distributor.
-----------------------
1.1 The Distributor will act as agent for the distribution of Shares
in accordance with the instructions of the Company's Board of Directors and the
Company's registration statement and prospectuses then in effect under the
Securities Act of 1933, as amended, and will transmit promptly any orders
received by it for the purchase or redemption of Shares to the Company's
transfer agent or to any qualified broker/dealer for transmittal to said agent.
1.2 The Distributor agrees to use its best efforts to solicit orders
for the sale of Shares and will undertake such advertising and promotion as it
believes appropriate in connection with such solicitation. The Company
understands that the Distributor may in the future be the distributor of shares
of other investment company portfolios ("Portfolios") including Portfolios
having investment objectives similar to those of the Funds. The Company further
understands that existing and future investors in the Funds may invest in shares
of such other Portfolios. The Company agrees that the Distributor's duties to
such Portfolios shall not be deemed in conflict with its duties to the Company,
under this Paragraph 1.2.
<PAGE>
1.3 The Distributor shall, at its own expense, finance such
activities as it deems reasonable and which are primarily intended to result in
the sale of Shares, including, but not limited to, advertising, compensation of
underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current shareholders, and the printing and mailing of
sales literature. In addition, the Distributor will provide one or more
persons, during normal business hours, to respond to telephone questions with
respect to the Funds. It is contemplated that the Distributor will enter into
selling agreements with qualified broker/dealers and other persons with respect
to the offering of Shares to the public, and in so doing will act only on its
own behalf as principal.
1.4 All Shares offered for sale by the Distributor shall be offered
for sale to the public at a price per share (the "offering price") equal to (a)
their net asset value (determined in the manner set forth in the Company's
charter documents and the then current prospectus) plus, except to those classes
of persons or transactions described in the then current Prospectus, (b) a sales
charge which shall be the percentage of the offering price of such Shares as set
forth in the Company's then current prospectus. The offering price, if not an
exact multiple of one cent, shall be adjusted to the nearest cent. Concessions
by the Distributor to broker/dealers and other persons shall be set forth in
either the selling agreements between the Distributor and such broker/dealers
and persons, as from time to time amended, or if such concessions are described
in the Company's then current prospectus, shall be as so set forth. No
broker/dealer or other person who enters into a selling agreement with the
Distributor shall be authorized to act as agent for the Company in connection
with the offering or sale of the Shares to the public or otherwise.
1.5 If any Shares sold by the Company are redeemed or repurchased by
the Company or by the Distributor as agent or are tendered for redemption within
seven business days after the date of confirmation of the original purchase of
said Shares, the Distributor shall forfeit the amount above the net asset value
received by the Distributor in respect of such Shares, provided that the
portion, if any, of such amount re-allowed by the Distributor to broker/dealers
or other persons shall be repayable to the Company only to the extent recovered
by the Distributor from the broker/dealer or other person involved. The
Distributor shall include in each selling agreement with such broker/dealers and
other persons a corresponding provision for the forfeiture by them of their
concession with respect to Shares sold by them or their principals and redeemed
or repurchased by the Company or by the Distributor as agent (or tendered for
redemption) within seven business days after the date of confirmation of such
initial purchases.
-2-
<PAGE>
1.6 All activities by the Distributor and its agents and employees as
distributor of Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted pursuant to the Investment Company Act of 1940 by the Securities and
Exchange Commission or any securities association registered under the
Securities Exchange Act of 1934.
1.7 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Company's officers may decline to accept any orders for or make any
sales of Shares until such time as those officers deem it advisable to accept
such orders and to make such sales.
1.8 The Company agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
Shares for sale in such states as the Company may approve, and the Company shall
pay all fees and other expenses incurred in connection with such qualification.
The Distributor agrees to pay all expenses related to its own qualification as a
broker or dealer required by any federal or state law or self-regulatory
organization and, except as otherwise specifically provided in this Contract,
all other expenses incurred by the Distributor in connection with the offering
of Shares as contemplated by this Contract.
1.9 The Company shall timely furnish from time to time, for use in
connection with the sale of Shares, such information with respect to the Funds
and Shares as the Distributor may reasonably request; and the Company warrants
that the statements contained in any such information shall fairly show or
represent what they purport to show or represent. The Company shall also
furnish the Distributor upon request with: (a) audited annual and unaudited
semi-annual statements of the Company's books and accounts with respect to each
Fund, and, (b) from time to time such additional information regarding the
Funds' financial condition as the Distributor may reasonably request.
1.10 The Company represents to the Distributor that all registration
statements and prospectuses filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, with respect
to Shares have been prepared in conformity with the requirements of said Act and
rules and regulations of the Securities and Exchange Commission thereunder. As
used in this Contract, the terms "registration statement" and "prospectus" shall
mean any registration statement, prospectus (together with the related statement
of additional information) filed with respect to Shares with the Securities and
Exchange Commission, and any amendments and
-3-
<PAGE>
supplements thereto which at any time shall have been filed with said
Commission. The Company represents and warrants to the Distributor that any
registration statement and prospectus, when such become effective, will contain
all statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission; that all statements of fact contained
in any such registration statement and prospectus will be true and correct when
such registration statement and prospectus become effective; and that neither
any registration statement nor any prospectus, when they become effective, will
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of Shares. The Company may but shall not be obligated
to propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus which, in the
light of future developments, may, in the opinion of the Company's counsel, be
necessary or advisable. The Company shall promptly notify the Distributor of
any advice given to it by the Company's counsel regarding the necessity or
advisability so to amend or supplement such registration statement or
prospectus. If the Company shall not propose such amendment or amendments
and/or supplement or supplements within fifteen days after receipt by the
Company of a written request from the Distributor to do so, the Distributor may,
at its option, terminate this Contract. The Company shall not file any
amendment to any registration statement or supplement to any prospectus without
giving the Distributor reasonable notice thereof in advance; provided, however,
that nothing contained in this Contract shall in any way limit the Company's
right to file at any time such amendments to any registration statements and/or
supplements to any prospectus, of whatever character, as the Company may deem
advisable, such right being in all respects absolute and unconditional.
1.11 The Company authorizes the Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of Shares. The Company agrees to indemnify, defend and hold the Distributor,
its several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the Securities Act of 1933, as amended, free
and harmless from and against any and all claims, demands, liabilities and
reasonable expenses (as those expenses are incurred) (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Distributor, its officers and
directors, or any such controlling person may incur under the Securities Act of
1933, as amended, or under common law or otherwise, arising out of or based upon
any untrue statement, or alleged untrue statement, of a material fact contained
in any registration statement or any prospectus or arising out of or based upon
any omission, or alleged omission, to state a material
-4-
<PAGE>
fact required to be stated in any registration statement or prospectus or
necessary to make any statement in such documents not misleading; provided,
--------
however, that the Company's agreement to indemnify the Distributor, its officers
-------
or directors, and any such controlling person shall not be deemed to cover any
claims, demands, liabilities or expenses arising out of any untrue statement or
alleged untrue statement or omission or alleged omission made in any
registration statement or prospectus or in any financial or other statements in
reliance upon and in conformity with any information furnished to the Company by
the Distributor and used in the preparation thereof; and further provided that
------- --------
the Company's agreement to indemnify the Distributor and the Company's
representations and warranties herein set forth shall not be deemed to cover any
liability to the Company or its shareholders to which the Distributor would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of the Distributor's
reckless disregard of its obligations and duties under this Contract. The
Company's agreement to indemnify the Distributor, its officers and directors,
and any such controlling person, as aforesaid, is expressly conditioned upon the
Company's being notified of any action brought against the Distributor, its
officers or directors, or any such controlling person, such notification to be
given by letter or by telegram addressed to the Company at its principal office
in [Boston, Massachusetts] and sent to the Company by the person against whom
such action is brought within 20 days after the summons or other first legal
process shall have been served. The failure to so notify the Company of any
such action shall not relieve the Company from any liability which the Company
may have to the person against whom such action is brought by reason of any such
untrue, or allegedly untrue, statement or omission, or alleged omission,
otherwise than on account of the Company's indemnity agreement contained in this
paragraph 1.11. The Company will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or liability, but, in such case, such
defense shall be conducted by counsel of good standing chosen by the Company and
approved by the Distributor, which approval shall not unreasonably be withheld.
In the event the Company elects to assume the defense of any such suit and
retain counsel of good standing approved by the Distributor, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case the Company does not elect to
assume the defense of any such suit, or in case the Distributor reasonably does
not approve of counsel chosen by the Company, the Company will reimburse the
Distributor, its officers and directors, or the controlling person or persons
named as defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by the Distributor or them. The Company's
indemnification agreement contained in this paragraph 1.11 and the Company's
representations and warranties in this Contract shall remain
-5-
<PAGE>
operative and in full force and effect regardless of any investigation made by
or on behalf of the Distributor, its officers and directors, or any controlling
person and shall survive the delivery of any Shares. This agreement of
indemnity will inure exclusively to the Distributor's benefit, to the benefit of
its several officers and directors, and their respective estates, and to the
benefit of the controlling persons and their successors. The Company agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the issue and sale of any Shares.
1.12 The Distributor agrees to indemnify, defend and hold the
Company, its several officers and directors, and any person who controls the
Company within the meaning of Section 15 of the Securities Act of 1933, as
amended, free and harmless from and against any and all claims, demands,
liabilities and reasonable expenses (as those expenses are incurred) (including
the costs of investigating or defending such claims, demands or liabilities and
any counsel fees incurred in connection therewith) which the Company, its
officers or directors or any such controlling person may incur under the
Securities Act of 1933, as amended, or under common law or otherwise, but only
to the extent that such liability or expense incurred by the Company, its
officers or directors, or such controlling person resulting from such claims or
demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished by the
Distributor to the Company or its counsel and used in the Company's registration
statement or corresponding statement made in the prospectus, or shall arise out
of or be based upon any omission, or alleged omission, to state a material fact
in connection with such information furnished by the Distributor to the Company
or its counsel required to be stated in such answers or necessary to make such
information not misleading. The Distributor's agreement to indemnify the
Company, its officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon the Distributor being notified of any
action brought against the Company, its officers or directors, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Distributor at its principal office in Pittsburgh, Pennsylvania
and sent to the Distributor by the person against whom such action is brought,
within 20 days after the summons or other first legal process shall have been
served. The failure to so notify the Distributor of any such action shall not
relieve the Distributor from any liability which the Distributor may have to the
Company, its officers or directors, or to such controlling person by reason of
any such untrue or alleged untrue statement, or omission or alleged omission,
otherwise than on account of the Distributor's indemnity agreement contained in
this paragraph 1.12. The Distributor shall have the right to control the defense
of such action, with
-6-
<PAGE>
counsel of its own choosing, satisfactory to the Company, if such action is
based solely upon such alleged misstatement or omission on the Distributor's
part, and in any other event the Company, its officers or directors or such
controlling person shall each have the right to participate in the defense or
preparation of the defense of any such action. In the event the Distributor
elects to assume the defense of any such suit and retain counsel of good
standing approved by the Company, the defendant or defendants in such suit shall
bear the fees and expenses of any additional counsel retained by any of them;
but in case the Distributor does not elect to assume the defense to any such
suit, or in case the Company reasonably does not approve of counsel chosen by
the Distributor, the Distributor will reimburse the Company, its officers and
directors, or the controlling person or persons named as defendant or defendants
in such suit, for the reasonable fees and expenses of any counsel retained by
the Company or them. The Distributor's indemnification agreement contained in
this paragraph 1.12 and the Distributor's representations and warranties in this
Contract shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company, its officers and directors,
or any controlling person and shall survive the delivery of any Shares. This
agreement of indemnity will inure exclusively to the Company's benefit, to the
benefit of its several officers and directors, and their respective estates, and
to the benefit of the controlling persons and their successors. The Distributor
agrees promptly to notify the Company of the commencement of any litigation or
proceedings against the Distributor or any of its officers or directors in
connection with the issue and sale of any Shares.
1.13 No Shares shall be offered by either the Distributor or the
Company under any of the provisions of this Contract and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Company if and so
long as effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the Securities Act of 1933, as amended, or if and so long as a current
prospectus, as required by Section 10(b) of said Act, as amended, is not on file
with the Securities and Exchange Commission; provided, however, that nothing
contained in this paragraph 1.13 shall in any way restrict or have any
application to or bearing upon the Company's obligation to repurchase Shares
from any shareholder in accordance with the provisions of the Company's
prospectus or charter documents.
1.14 The Company agrees to advise the Distributor as soon as
reasonably practical:
(a) of any request by the Securities and Exchange Commission for
amendments to the registration statement or prospectus then in effect;
-7-
<PAGE>
(b) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the
registration statement or prospectus then in effect or the initiation
of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration statement or
prospectus then in effect or which requires the making of a change in
such registration statement or prospectus in order to make the
statements therein not misleading; and
(d) of all actions of the Securities and Exchange Commission
with respect to any amendment to any registration statement or
prospectus which may from time to time be filed with the Securities
and Exchange Commission.
For purposes of this section, informal requests by or acts of the
Staff of the Securities and Exchange Commission shall not be deemed actions of
or requests by the Securities and Exchange Commission.
1.15 The Distributor agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Company all records
and other information relative to the Funds and its prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Company, which approval
shall not be unreasonably withheld any may not be withheld where the Distributor
may be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities, or
when so requested by the Company.
2. Term.
----
This Contract shall become effective on August 1, 1995 and, unless
sooner terminated as provided herein, shall continue until July 31, 1996, and
thereafter shall continue automatically with respect to each Fund for successive
annual periods ending on July 31 of each year, provided such continuance is
specifically approved at least annually by (i) the Company's Board of Directors
or (ii) by a vote of a majority (as defined in the Investment Company Act of
1940) of the outstanding voting securities of the Fund, and provided that in
--------
either event the continuance is also approved by the majority of the Company's
directors who are not parties to this Contract or interested persons (as defined
in the Investment Company Act 1940) of any such party, by vote cast in person at
a meeting called for the
-8-
<PAGE>
purpose of voting on such approval. This Contract is not assignable and is
terminable with respect to each Fund, without penalty, on not less than ninety
days' notice prior to each successive annual renewal periods, by the Company's
Board of Directors, by vote of a majority (as defined in the Investment Company
Act of 1940) of the outstanding voting securities of such Fund, or by the
Distributor. This Contract will terminate automatically in the event of its
"assignment" (as defined in the Investment Company Act of 1940). The parties
agree that an assignment includes the transfer of "control" of more than 25% of
the outstanding voting securities of the Distributor to a company that is not a
subsidiary of Federated.
3. Miscellaneous.
-------------
3.1 No provision of this Contract may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought. This Contract may be executed in one or more counterparts and all such
counterparts will constitute one and the same instrument.
3.2 This Contract shall be governed by the laws of the Commonwealth
of Pennsylvania.
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Yours very truly,
UST MASTER TAX-EXEMPT FUNDS, INC.
By:_______________________________
Title: President
Accepted:
EDGEWOOD SERVICES, INC.
By:__________________________________
Title: Executive Vice President
-9-
<PAGE>
Exhibit A to the
Distribution Contract
UST MASTER TAX-EXEMPT FUNDS, INC.
---------------------------------
Short-Term Tax-Exempt Fund
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
New York Intermediate-Term Tax-Exempt Fund
In consideration of the mutual covenants set forth in the Distribution
Contract dated as of August 1, 1995, between UST Master Tax-Exempt Funds, Inc.
and Edgewood Services, Inc., UST Master Tax-Exempt Funds, Inc. executes and
delivers this Exhibit on behalf of the Funds, and with respect to any Classes,
thereof, first set forth in this Exhibit.
Witness the due execution hereof this 1st day of August, 1995.
ATTEST: UST MASTER TAX-EXEMPT FUNDS, INC.
___________________________________ ______________________________________
Secretary President
(SEAL)
ATTEST: EDGEWOOD SERVICES, INC.
___________________________________ ______________________________________
Secretary Executive Vice President
(SEAL)
<PAGE>
Exhibit 9(a)
FORM OF ADMINISTRATION AGREEMENT
This AGREEMENT made as of August 1, 1991 by and among UST MASTER
TAX-EXEMPT FUNDS, INC., UST MASTER FUNDS, INC., each a Maryland corporation
(individually and collectively referred to as the "Company"), MUTUAL FUNDS
SERVICE COMPANY, a Delaware corporation ("MFSC"), and FEDERATED ADMINISTRATIVE
SERVICES ("FAS"), a Delaware trust, (MFSC and FAS are collectively referred
to as the "Administrators").
WITNESSETH:
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"); and
WHEREAS, the Company wishes to retain the Administrators to provide,
as co-administrators, certain administration services with respect to one
or more of the Company's investment portfolios (individually, a "Fund,"
collectively, the "Funds"), as described and set forth on one or more exhibits
to this Agreement, and the Administrators are willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Company hereby appoints the Administrators
-----------
to provide administration services to the Funds for the period and on the
terms set forth in this Agreement. The Administrators accept such appointment
and agree to furnish the services herein set forth in return for the
compensation as provided in Paragraph 4 of this Agreement. In the event
that the Company establishes one or more investment portfolios other than
the Funds with respect to which it decides to retain the Administrators
to act as co-administrators hereunder, the Company shall notify the
Administrators in writing. If the Administrators are willing to render such
services to a new investment portfolio, they shall so notify the Company
in writing whereupon such investment portfolio shall become a Fund hereunder
and shall be subject to the provisions of this Agreement to the same extent
as the Funds, except to the extent that said provisions (including those
relating to the compensation payable by the Company) may be modified with
respect to such investment portfolio in writing by the Company and the
Administrators at the time of the addition of such new investment portfolio.
2. Delivery of Documents. The Company has furnished each of the
---------------------
Administrators with copies, properly certified or authenticated, of each
of the following:
<PAGE>
(a) Resolutions of the Company's Board of Directors authorizing
the appointment of the Administrators to provide certain administration
services to the Company and approving this Agreement;
(b) The Company's Articles of Incorporation ("Charter");
(c) The Company's Bylaws ("Bylaws");
(d) The Company's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission
("SEC") on [August 31, 1984/ ];
(e) The Company's most recent Post-Effective Amendment to its
Registration Statement on Form N-1A (No. 2-93068/2-92665) (the "Registration
Statement") under the Securities Act of 1933 and the 1940 Act, as filed
with the SEC;
(f) The Company's Administrative Services and Amended and Restated
Distribution Plans and the accompanying form of shareholder servicing
agreement; and
(g) The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented,
herein called the "Prospectus").
The Company will timely furnish each of the Administrators
from time to time with copies, properly certified or authenticated, of all
amendments of or supplements to the foregoing, if any.
3. Services and Duties. Subject to the supervision and control
-------------------
of the Company's Board of Directors, and as delineated on one or more Exhibit
to the Agreement, the Administrators agree to assist in supervising various
aspects of each Fund's administrative operations, including the performance
of the following specific services for each Fund:
(a) Provide office facilities (which may be in the offices
of either of the Administrators or a corporate affiliate of either of them,
but shall be in such location as the Company shall reasonably approve);
(b) Furnish statistical and research data, clerical services,
and stationery and office supplies;
-2-
<PAGE>
(c) Keep and maintain all financial accounts and records (other
than those required to be maintained by the Company's Custodian and Transfer
Agent);
(d) Compute each Fund's net asset value, net income and net
capital gain (loss) in accordance with the Company's Prospectus and resolutions
of its Board of Directors;
(e) Compile data for and prepare for execution and file with
the SEC required reports and notices to shareholders of record and the SEC
including, without limitation, Semi-Annual and Annual Reports to Shareholders,
Semi-Annual Reports on Form N-SAR and timely Rule 24f-2 Notices;
(f) Compile data for, prepare for execution and file all reports
or other documents required by Federal, state and other applicable laws and
regulations, including those required by applicable laws and regulations,
including those required by applicable Federal and state tax laws (other
than those required to be filed by the Company Custodian or Transfer Agent);
(g) Review and provide advice with respect to all sales literature
(advertisements, brochures and shareholder communications) for each of the
Funds and any class or series thereof;
(h) Assist in developing and monitoring compliance procedures
for each Fund and any class or series thereof, including, without limitation,
procedures to monitor compliance with applicable law and regulations, each
Fund's investment objectives, policies and restrictions, its continued
qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended, and other tax matters;
(i) Monitor the Company's arrangements with respect to services
provided by certain organizations ("Service Organizations") under its
Administrative Services and Amended and Restated Distribution Plans. With
respect to Service Organizations, the Administrators shall specifically
monitor and review the services rendered by Service Organizations to their
customers who are the beneficial owners of shares, pursuant to agreements
between the Company and such Service Organizations ("Servicing Agreements"),
including, without limitation, reviewing the qualifications of financial
institutions wishing to be Service Organizations, assisting in the execution
and delivery of Servicing Agreements, reporting to the Company's Board of
Directors with respect to the amounts paid or payable by the Company from
time to time under the Servicing Agreements and the nature of the services
provided by Service Organizations, and maintaining appropriate records in
connection with such duties.
-3-
<PAGE>
(j) Determine, together with the Company's Board of Directors, the
jurisdictions in which the Company's shares shall be registered or qualified
for sale and, in connection therewith, the Administrators shall be responsible
for the maintenance of the registration or qualification of shares for sale
under the securities laws of any state. Payment of share registration fees and
any fees for qualifying or continuing the qualification of any Fund as a
dealer or broker, if applicable, shall be made by that Fund;
(k) Assist to the extent requested by the Company and its outside
counsel with the preparation of the Company's Registration Statement on
Form N-1A or any replacement therefor; and
(l) Assist in the monitoring of regulatory and legislative
developments which may affect the Company and in response to such developments,
counseling and assisting the Company in routine regulatory examinations
or investigations of the Company, and working with outside counsel to the
Company in connection with regulatory matters or litigation.
In performing their duties as co-administrators of the Company, the
Administrators (a) will act in accordance with the Company's Charter, Bylaws,
Prospectus and the instructions and directions of the Company's Board of
Directors and will conform to, and comply with, the requirements of the
1940 Act and all other applicable Federal or state laws and regulations,
and (b) will consult with outside legal counsel to the Company, as necessary
or appropriate.
The Administrators will preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under said Act in connection with the services required to be performed
hereunder. The Administrators further agree that all such records which
they maintain for the Company are the property of the Company and further
agree to surrender promptly to the Company any of such records upon the
Company's request.
4. Fees; Expenses; Expense Reimbursement.
-------------------------------------
For the services rendered pursuant to this Agreement for all Funds
(except the International Fund of UST Master Funds, Inc.), the Administrators
shall be entitled jointly to a fee based on the average net assets of the
Company, determined at the following annual rates applied to the average
combined daily net assets of all of the Funds (except the International
Fund): .20% of the first $200 million; .175% of the next $200 million; and
.15% of any amount in excess of $400 million. Each Fund (except the
International Fund) will pay a portion of the total fee payable by the Company
in an amount equal to the proportion that
-4-
<PAGE>
such Fund's average daily net assets bears to the total average daily net
assets of all the Funds of the Company (except the International Fund).
For the services provided to the International Fund, the Administrators
shall be entitled jointly to a fee, at the annual rate of .20% of the average
daily net assets of the International Fund. The fee attributable to each
Fund shall be the several (and not joint or joint and several) obligation
of each Fund. Such fees are to be computed daily and paid monthly on the
first business day of the following month. Upon any termination of this
Agreement before the end of any month, the fee for such part of the month
shall be pro-rated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of termination
of this Agreement. The Administrators agree that any fee payable by the
Company under this Agreement shall be payable to United States Trust Company
of New York, as agent for both Administrators, and that such payment shall
discharge the Company's payment obligation hereunder. However, such joint
fee payment does not create any joint and/or several liability between the
Administrators for the services provided by the other.
For purposes of determining fees payable to the Administrators, the
value of each Fund's net assets shall be computed as required by its
Prospectus, generally accepted accounting principles, and resolutions of
the Company's Board of Directors.
The Administrators will from time to time employ or associate with
themselves such person or persons as they may believe to be fitted to assist
them in the performance of this Agreement. Such person or persons may be
officers and employees who are employed by both the Administrators and the
Company. The compensation of such person or persons for such employment
shall be paid by the Administrators and no obligation may be incurred on
behalf of the Company in such respect.
The Administrators will bear all expenses in connection with the
performance of their services under this Agreement except as otherwise
expressly provided herein. Other expenses to be incurred in the operation
of the Funds, including taxes, interest, brokerage fees and commissions,
if any, salaries and fees of officers and directors who are not officers,
directors, shareholders or employees of the Administrators, or the Company's
investment Adviser or distributor for the Funds, Securities and Exchange
Commission fees and state Blue Sky qualification fees, advisory and
Administration fees, charges of custodians, transfer and dividend Disbursing
agents' fees, certain insurance premiums, outside auditing and legal expenses,
payments to Service Organizations, costs of maintenance of corporate existence,
typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Funds, costs
-5-
<PAGE>
of shareholders' reports and corporate meetings and any extraordinary expenses,
will be borne by the Company, provided, however, that, except pursuant to
-------- -------
the Amended and Restated Distribution Plan the Company will not bear, directly
or indirectly, the cost of any activity which is primarily intended to result
in the distribution of shares of the Funds, and further provided that the
------- --------
Administrators may utilize one or more independent pricing services, approved
from time to time by the Board of Directors of the Company, to obtain
securities prices in connection with determining the net asset value of
each Fund and that each Fund will reimburse the Administrators for its share
of the cost of such services based upon its actual use of the services.
If in any fiscal year any Fund's aggregate expenses (as defined under
the securities regulations of any state having jurisdiction over the Fund)
exceed the expense limitations of any such state, the Administrators agree
to reimburse such Fund for a portion of any such excess expenses in an amount
equal to the proportion that the fees otherwise payable to the Administrators
bears to the total amount of investment advisory and administration fees
otherwise payable by the Fund. The expense reimbursement obligation of the
Administrators is limited to the amount of their fees hereunder for such
fiscal year, provided, however, that notwithstanding the foregoing, the
-------- -------
Administrators shall reimburse such Fund for a portion of any such excess
expenses in an amount equal to the proportion that the fee otherwise payable
to the Administrator bears to the total amount of investment advisory and
administration fees otherwise payable by the Fund regardless of the amount
of fee paid to the Administrators during such fiscal year to the extent
that the securities regulations of any state having jurisdiction over the
funds so require. Such expense reimbursement, if any, will be estimated,
reconciled and paid on a monthly basis.
5. Proprietary and Confidential Information. The Administrators agree
----------------------------------------
on behalf of themselves and their employees to treat confidentially and
as proprietary information of the Company all records and other information
relative to the Funds and prior, present or potential shareholders, and
not to use such records and information for any purpose other than performance
of their responsibilities and duties hereunder, except after prior notification
to and approval in writing by the Company, which approval shall not be
unreasonably withheld and may not be withheld where the Administrators may
be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities,
or when so requested by the Company.
6. Limitation of Liability. Each Administrator shall not be liable for
any error of judgment or mistake of law or for any loss or expense suffered
by the Company, in connection with
-6-
<PAGE>
the matters to which this Agreement relates, except for a loss or expense
resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though
also an officer, partner, employee or agent of either of the Administrators,
who may be or become an officer, director, employee or agent of the Company,
shall be deemed when rendering services to the Company or acting on any
business of the Company (other than services or business in connection with
the Administrators' duties hereunder) to be rendering such services to or
acting solely for the Company and not as an officer, partner, employee or
agent or one under the control or direction of the Administrators even though
paid by either of them.
7. Term. This agreement shall become effective August 1, 1995
----
and, unless sooner terminated as provided herein, shall continue until July
31, 1996, and thereafter shall continue automatically with respect to each
Fund for successive annual periods ending on July 31 of each year, provided
such continuance is specifically approved at least annually by the Company's
Board of Directors. This Agreement is terminable with respect to each Fund,
without penalty, on not less than ninety days' notice prior to each successive
annual renewal periods, by the Company's Board of Directors or by the
Distributor. This Agreement will terminate automatically in the event of
its "assignment" (as defined in the Investment Company Act 1940). The parties
agree that an assignment includes the transfer of "control" of more than
25% of the outstanding voting securities of the Distributor to a company
that is not a subsidiary of Federated.
8. Governing Law. This Agreement shall be governed by New York
-------------
law.
9. Miscellaneous. No provisions of this Agreement may be changed,
-------------
discharged or terminated orally, but only by an instrument in writing signed
by the party against which enforcement of the change, discharge or termination
is sought. If a change or discharge is sought against the Company, the
instrument must be signed by both Administrators. This Agreement
-7-
<PAGE>
may be executed in one or more counterparts and all such counterparts will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers designated below is of the date indicated
below.
ATTEST: UST TAX-EXEMPT MASTER FUNDS, INC.
By:_____________________________ By:_______________________________
Title:
(SEAL)
ATTEST: UST MASTER FUNDS, INC.
By:_____________________________ By:_______________________________
Title:
(SEAL)
ATTEST: MUTUAL FUNDS SERVICE COMPANY
By:_____________________________ By:_______________________________
Title:
(SEAL)
ATTEST: FEDERATED ADMINISTRATIVE
SERVICES
By:_____________________________ By:_______________________________
Title:
(SEAL)
-8-
<PAGE>
Exhibit A
to the
Administration Agreement
UST MASTER FUNDS, INC.
----------------------
Money Fund
Government Money Fund
Treasury Money Fund
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
Equity Fund
Income and Growth Fund
Long-Term Supply of Energy Fund
Productivity Enhancers Fund
Environmentally-Related Products and Services Fund
Aging of America Fund
Communications and Entertainment Fund
Business and Industrial Restructuring Fund
Global Competitors Fund
Early Life Cycle Fund
International Fund
Emerging Americas Fund
Pacific/Asia Fund
Pan European Fund
UST MASTER TAX-EXEMPT FUNDS, INC.
---------------------------------
Short-Term Tax-Exempt Fund
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
New York Intermediate-Term Tax-Exempt Fund
In consideration of the mutual covenants set forth in the Administration
Agreement dated as of August 1, 1995 among UST Master Tax-Exempt Funds,
Inc., UST Master Funds, Inc., Master Funds Services Company ("MFSC"), and
Federated Administrative Services ("FAS"), UST Master Tax-Exempt Funds,
Inc. and UST Master Funds, Inc. each executes and delivers this Exhibit
on behalf of the Funds, and with respect to any Classes, thereof, first
set forth in this Exhibit.
Pursuant to Section 3 of the Agreement, FAS agrees to provide facilities,
equipment, and personnel to carry out the following administrative services
to these Funds, with the understanding that MFSC will provide all other
services and duties not otherwise listed below:
(a) Perform a due diligence review of SEC required reports and notices
to shareholders of record and the SEC including, without limitation,
Semi-Annual and Annual Reports to
<PAGE>
Shareholders' Semi-Annual Reports on Form N-SAR, Proxy Statements and SEC
share registration notices;
(b) Review the Company's Registration Statement on Form N-1A or any
replacement therefor;
(c) Review and file with the NASD all sales literature (advertisements,
brochures and shareholder communications) for each of the Funds and any
class or series thereof;
(d) Prepare distributor's reports to the Company's Board of Directors;
(e) Perform internal audit examinations in accordance with a charter
to be adopted by FAS and the Funds;
(f) Upon request, provide individuals reasonably acceptable to the
Company's Board of Directors for nomination, appointment, or election as
officers of the Company, who will be responsible for the management of certain
of the Funds' affairs as determined by the Company;
(h) Consult with the Funds and the Company's Board of Trustees, as
appropriate, on matters concerning the distribution of Funds; and
[(j) Consult with MFSC and the Company regarding the jurisdictions
in which the Company's shares shall be registered or qualified for sale
and, in connection therewith, review and monitor the actions of MFSC in
maintaining the registration or qualification of shares for sale under the
securities laws of any state. Payment of share registration fees and any
fees for qualifying or continuing the qualification of any Fund as a dealer
or broker, if applicable, shall be made by that Fund.] [MFSC to decide whether
or not it will perform blue sky. If so, above paragraph applies, if not,
then replace with modified version of Section 4(j) of Agreement to reflect
FAS's responsibility.]
-2-
<PAGE>
Witness the due execution hereof this 1st day of August, 1995.
ATTEST: UST MASTER TAX-EXEMPT FUNDS, INC.
--------------------------------- -----------------------------------
Secretary President
(SEAL)
ATTEST: UST MASTER FUNDS, INC.
--------------------------------- -----------------------------------
Secretary President
(SEAL)
ATTEST: FEDERATED ADMINISTRATIVE
SERVICES
--------------------------------- -----------------------------------
Secretary Executive Vice President
(SEAL)
ATTEST: MUTUAL FUNDS SERVICE COMPANY
--------------------------------- -----------------------------------
Secretary Executive Vice President
(SEAL)
-3-
<PAGE>
UST MASTER FUNDS, INC.
----------------------
AMENDED AND RESTATED ADMINISTRATIVE SERVICES PLAN
Section 1. Upon the recommendation of Mutual Funds Service Company
---------
("MFSC") an Administrator of UST Master Funds, Inc. (the "Company"), any
officer of the Company is authorized to execute and deliver, in the name and on
behalf of the Company, written agreements in substantially the form attached
hereto or in any other form duly approved by the Board of Directors ("Servicing
Agreements") with institutions that are shareholders of record or that have
clients that are shareholders of record or beneficial owners of any of the Funds
of the Company, including without limitation the Company's service providers and
their affiliates ("Service Organizations"). Such Servicing Agreements shall
require the Service Organizations to provide or arrange for the provision of
support services as set forth therein to their clients who beneficially own
Shares of any Fund offered by the Company in consideration of a fee, computed
and paid in the manner set forth in the Servicing Agreements, at the annual rate
of up to .40% of the applicable net asset value of Shares beneficially owned by
such clients. Among other institutions, any bank, trust company, thrift
institution or broker-dealer is eligible to become a Service Organization and to
receive fees under this Plan. All expenses incurred by the Company with respect
to a particular class or series of Shares of a particular Fund in connection
with Servicing Agreements and the implementation of this Plan shall be borne
entirely by the holders of that class or series.
Section 2. MFSC shall monitor the arrangements pertaining to the Company's
---------
Servicing Agreements with Service Organizations in accordance with the terms of
the Administration Agreement by and among MFSC, Federated Investors, Inc. and
the Company. MFSC shall not, however, be obliged by this Plan to recommend, and
the Company shall not be obliged to execute, any Servicing Agreement with any
qualifying Service Organization.
Section 3. So long as this Plan is in effect, MFSC shall provide to the
---------
Company's Board of Directors, and the Directors shall review, at least
quarterly, a written report of the amounts expended pursuant to this Plan and
the purposes for which such expenditures were made.
Section 4. This Plan shall become effective immediately upon the approval
---------
of the Plan (and the form of Servicing Agreement attached hereto) by a majority
of the Board
<PAGE>
of Directors, including a majority of the Directors who are not "interested
persons" as defined in the Investment Company Act of 1940 (the "Act") of the
Company and have no direct or indirect financial interest in the operation of
this Plan or in any Servicing Agreement or other agreements related to this Plan
(the "Disinterested Directors"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the approval of this Plan (or form of
Servicing Agreement).
Section 5. Unless sooner terminated, this Plan shall continue until July
---------
31, 1996 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually in the manner
set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of Directors,
---------
provided that any material amendments of the terms of this Plan shall become
effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority of
---------
the Disinterested Directors.
Section 8. While this Plan is in effect, the selection and nomination of
---------
the new Directors of the Company who are not "interested persons" (as defined in
the Act) of the Company shall be committed to the discretion of the existing
Disinterested Directors.
Section 9. The Company initially adopted this Plan as of February 21,
---------
1994, and amended this Plan as of February 10, 1995 and July 27, 1995.
-2-
<PAGE>
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, by and between UST Master Funds, Inc. (the "Corporation")
and the shareholder service organization (the "Organization") listed on the
signature page hereof;
WITNESSETH:
WHEREAS, certain transactions in Shares of Common Stock, $.001 par value,
of the Corporation or of any series now existing or later created of the
Corporations ("Shares") may be made by investors who are customers of, and using
the services of or arranged by, an Organization, including without limitation
the Company's service providers and their affiliates, that has entered into a
shareholder servicing agreement with the Corporation; and
WHEREAS, the Organization wishes to make it possible for its customers (the
"Customers") to purchase Shares and wishes to act as the Customers' agent in
performing or arranging for the performance of certain administrative functions
in connection with purchases, exchanges and redemptions of Shares from time to
time upon the order and for the account of Customers and to provide related
services to its Customers in connection with their investments in the
Corporation; and
WHEREAS, it is in the interest of the Corporation to make the services of
the Organization available to Customers who are or may become beneficial owners
of Shares of the Corporation;
NOW, THEREFORE, the Corporation and the Organization hereby agree as
follows:
1. Appointment. The Organization, as an independent contractor, hereby
-----------
agrees to perform or to have performed certain services for Customers as
hereinafter set forth. The Organization's appointment hereunder is non-
exclusive, and the parties recognize and agree that, from time to time, the
Corporation may enter into other shareholder servicing agreements, with others
without the Organization's consent. For the purposes of this Agreement, the
Organization is deemed an independent contractor and will have no authority to
act as the Corporation's agent in any respect.
<PAGE>
2. Service to be Performed.
-----------------------
2.1 Type of Service. The Organization shall be responsible for performing
---------------
or having performed shareholder account administrative and servicing functions,
which shall include without limitation/1/: (a) assisting Customers in
designating and changing dividend options, account designations and addresses;
(b) providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records, as may reasonably be requested from
time to time by the Corporation; (c) assisting in processing purchases, exchange
and redemption transactions; (d) arranging for the wiring of funds; (e)
transmitting and receiving funds in connection with Customer orders to purchase,
exchange or redeem Shares; (f) verifying and guaranteeing Customer signatures in
connection with redemption orders, transfers among and changes in Customer-
designated accounts; (g) providing periodic statements showing a Customer's
account balances and, to the extent practicable, integration of such information
with information concerning other client transactions otherwise effected with or
through the Organization; (h) furnishing on behalf of the Corporation's
distributor (either separately or on an integrated basis with other reports sent
to a Customer by the Organization) periodic statements and confirmations of all
purchases, exchanges and redemptions of Shares in a Customer's account required
by applicable federal or state law, all such confirmations and statements to
conform to Rule 10b-10 under the Securities Exchange Act of 1934 and other
applicable federal or state law; (i) transmitting proxy statements, annual
reports, updating prospectuses and other communications from the Corporation to
Customers; (j) receiving, tabulating and transmitting to the Corporation proxies
executed by Customers with respect to annual and special meetings of
shareholders of the Corporation; (k) providing reports (at least monthly, but
more frequently if so requested by the Corporation's distributor) containing
state-by-state listings of the principal residences of the beneficial owners of
the Shares; and (l) providing or arranging for the provision of such other
related services as the Corporation or a Customer may reasonably request. The
Organization shall provide or arrange for all personnel and facilities to
perform the functions described in this paragraph with respect to its Customers.
_______________
1. Services may be modified or omitted in a particular case and items
relettered or renumbered.
-2-
<PAGE>
2.2 Standard of Services. All services to be rendered or arranged for by
--------------------
the Organization hereunder shall be performed in a professional, competent and
timely manner. The details of the operating standards and procedures to be
followed in performance of the services described above shall be determined from
time to time by agreement between the Organization and the Corporation. The
Corporation acknowledges that the Organization's ability to perform on a timely
basis certain of its obligations under this Agreement depends upon the
Corporation's timely delivery of certain materials and/or information to the
Organization. The Corporation agrees to use its best efforts to provide such
materials to the Organization in a timely manner.
3. Fees.
----
3.1 Fees from the Corporation. In consideration for the services
-------------------------
described in Section 2 hereof and the incurring of expenses in connection
therewith, the Organization shall receive fees set forth in Appendix A hereto,
such fees to be paid in arrears periodically (but in no event less frequently
than semi-annually) at annual rates of up to .40% of the average daily net
assets of the Corporation's Shares owned during the period for which payment has
been made by Customers for whom the Organization is the holder or agent of
record or with whom it maintains a servicing relationship. For purposes of
determining the fees payable to the Organization hereunder, the value of the
Corporation's net assets shall be computed in the manner specified in the
Corporation's then-current prospectus for computation of the net asset value of
the Corporation's Shares. The above fees constitute all fees to be paid to the
Organization by the Corporation with respect to the transactions contemplated
hereby. The Corporation may at any time in its discretion suspend or withdraw
the sale of its Shares.
3.2 Fees from Customers. It is agreed that the Organization may impose
-------------------
certain conditions on Customers, in addition to or different from those imposed
by the Corporation, such as requiring a minimum initial investment or charging
Customers direct fees for the same or similar services as are provided hereunder
by the Organization (which fees may either relate specifically to the
Organization's services with respect to the Corporation or generally cover
services not limited to those with respect to the Corporation). The
Organization shall bill Customers directly for such fees. In the event the
Organization charges Customers such fees, it shall notify the Corporation in
advance and make appropriate prior written disclosure (such disclosure to be in
accordance with all applicable laws) to Customers of any such fees charged to
the Customer. To the extent required by applicable rules and regulations of the
Securities and Exchange Commission, the
-3-
<PAGE>
Corporation shall make written disclosure of the fees paid or to be paid to the
Organization pursuant to Section 3.1 of this Agreement. It is understood,
however, that in no event shall the Organization have recourse or access to the
account of any shareholder of the Corporation except to the extent expressly
authorized by law or by such shareholder, or to any assets of the Corporation,
for payment of any direct fees referred to in this Section 3.2.
4. Information Pertaining to the Shares. The Organization and its
------------------------------------
officers, employees and agents are not authorized to make any representations
concerning the Corporation or the Shares to Customers or prospective Customers,
excepting only accurate communication of any information provided by or on
behalf of any administrator or distributor of the Corporation or any factual
information contained in the then-current prospectus relating to the Corporation
or to any series of the Corporation. In furnishing such information regarding
the Corporation or the Shares, the Organization shall act as agent for the
Customer only and shall have no authority to act as agent for the Corporation.
Advance copies or proofs of all materials which are generally circulated or
disseminated by the Organization to Customers or prospective Customers which
identify or describe the Corporation shall be provided to the Corporation at
least 10 days prior to such circulation or dissemination (unless the Corporation
consents in writing to a shorter period), and such materials shall not be
circulated or disseminated or further circulated or disseminated at any time
after the Corporation shall have given written notice within such 10 day period
to the Organization of any objection thereto.
Nothing in this Section 4 shall be construed to make the Corporation liable
for the use (or accuracy unless prepared by the Corporation for the specific
use) of any information about the Corporation which is disseminated by the
Organization.
5. Use of the Organization's Name. The Corporation shall not use the name
------------------------------
of the Organization (or any of its affiliates or subsidiaries) in any
prospectus, sales literature or other material relating to the Corporation in a
manner not approved by the Organization prior thereto in writing; provided,
however, that the approval of the Organization shall not be required for any use
of its name which merely refers in accurate and factual terms to its appointment
hereunder and the terms hereof or which is required by law, including without
limitation, by the Securities and Exchange Commission or any state securities
authority or any other appropriate regulatory, governmental or
judicial authority; provided, further, that in no event shall such approval be
unreasonably withheld or delayed.
-4-
<PAGE>
6. Use of the Corporation's Name. The Organization shall not use the name
-----------------------------
of the Corporation on any checks, bank drafts, bank statements or forms for
other than internal use in a manner not approved by the Corporation prior
thereto in writing; provided, however, that the approval of the Corporation
shall not be required for the use of the Corporation's name in connection with
communications permitted by Section 4 hereof or (subject to Section 4, to the
extent the same may be applicable) for any use of the Corporation's name which
merely refers in accurate and factual terms to the Corporation in connection
with the Organization's role hereunder or which is required by law, including
without limitations, by the Securities and Exchange Commission or any state
securities authority or any other appropriate regulatory, governmental or
judicial authority; provided, further, that in no event shall such approval be
unreasonably withheld or delayed.
7. Security. The Organization represents and warrants that to the best of
--------
its knowledge, the various procedures and systems which it has implemented
(including provision for twenty-four hours a day restricted access) with regard
to safeguarding from loss or damage attributable to fire, theft or any other
cause the Corporation's records and other data and the Organization's records,
data, equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as in its judgment are required for the secure performance of
its obligations hereunder. The parties shall review such systems and procedures
on a periodic basis, and the Corporation shall from time to time specify the
types of records and other data of the Corporation to be safeguarded in
accordance with this Section 7.
8. Compliance with Laws. The Organization shall comply with all
--------------------
applicable federal and state laws and regulations, including without limitation
securities laws. The Organization represents and warrants to the Corporation
that the performance of all its obligations hereunder will comply with all
applicable laws and regulations, the provisions of its charter documents and by-
laws and all material contractual obligations binding upon the Organization.
The Organization furthermore undertakes that it will promptly, after the
Organization becomes so aware, inform the Corporation of any change in
applicable laws or regulations (or interpretations thereof) or in its charter or
by-laws or material contracts which would prevent or impair full performance of
any of its obligations hereunder.
9. Reports. Quarterly, and more frequently to the extent requested by the
-------
Corporation from time to time, the Organization agrees that it will provide the
administrator of the Corporation
-5-
<PAGE>
with a written report of the amounts expended by the Organization pursuant to
this Agreement and the purposes for which such expenditures were made. Such
written reports shall be in a form satisfactory to the Corporation and shall
supply all information necessary for the Corporation to discharge its
responsibilities under applicable laws and regulations.
10. Record Keeping.
--------------
10.1 Section 31. The Organization shall maintain records in a form
----------
reasonably acceptable to the Corporation and in compliance with applicable laws
and the rules and regulations of the Securities and Exchange Commission,
including but not limited to the record-keeping requirements of Section 31 of
the Investment Company Act of 1940, as amended (the "1940 Act") and the rules
thereunder. Such records shall be deemed to be the property of the Corporation
and will be made available at the Corporation's request for inspection and use
by the Corporation, representatives of the Corporation and governmental
authorities. The Organization agrees that, for so long as it retains any
records of the Corporation, it will meet all reporting requirements pursuant to
the 1940 Act and applicable to the Organization with respect to such records.
Upon termination of this Agreement, the Organization shall deliver to the
administrator of the Corporation all books and records maintained by the
Organization and deemed to be the Corporation's property hereunder.
10.2 Rules 17a-3 and 17a-4. The Organization shall maintain accurate and
---------------------
complete records with respect to services performed by the Organization in
connection with the purchase and redemption of Shares. Such records shall be
maintained in form reasonably acceptable to the Corporation and in compliance
with the requirements of all applicable laws, rules and regulations, including
without limitation, Rules 17a-3 and 17a-4 under the Securities Exchange Act of
1934, as amended, pursuant to which any dealer of the Shares must maintain
certain records. All such records maintained by the Organization shall be the
property of such dealer and will be made available for inspection and use by the
Corporation or such dealer upon the request of either. The Organization shall
file with the Securities and Exchange Commission and other appropriate
governmental authorities, and furnish to the Corporation and any such dealer
copies of, all reports and undertakings as may be reasonably requested by the
Corporation or such dealer in order to comply with the said rules. If so
requested by any such dealer, the Organization shall confirm to such dealer its
obligations under this Section 10.2 by a writing reasonably satisfactory to such
dealer.
-6-
<PAGE>
10.3 Transfer of Customer Data. In the event this Agreement is terminated
-------------------------
or a successor to the Organization is appointed, the Organization shall transfer
to such designee as the Corporation may direct a certified list of the
shareholders of the Corporation serviced by the Organization (with name, address
and tax identification or Social Security number, if any), a complete record of
the account of each such shareholder and the status thereof, and all other
relevant books, records, correspondence, and other data established or
maintained by the Organization under this Agreement. In the event this
Agreement is terminated, the Organization will use its best efforts to cooperate
in the orderly transfer of such duties and responsibilities, including
assistance in the establishment of books, records and other data by the
successor.
10.4 Survival of Record-Keeping Obligations. The record-keeping
--------------------------------------
obligations imposed in this Section 10 shall survive the termination of this
Agreement for a period of three years.
10.5 Obligations Pursuant to Agreement Only. Nothing in this Section 10
--------------------------------------
shall be construed so that the Organization would, by virtue of its role
hereunder, be required under applicable law to maintain the records required to
be maintained by it under this Section 10, but is understood that the
Organization has agreed to do so in order to enable the Corporation and its
dealer or dealers to comply with laws and regulations applicable to them.
10.6 Organization's Rights to Copy Records. Anything in this Section 10
-------------------------------------
to the contrary notwithstanding, except to the extent otherwise prohibited by
law, the Organization shall have the right to copy, maintain and use any records
maintained by the Organization pursuant to this Section 10, except as otherwise
prohibited by Sections 4 and 6 hereof.
11. Force Majeure. The Organization shall not be liable or responsible
-------------
for delays or errors by reason of circumstances beyond its reasonable control,
including, but not limited to, acts of civil or military authority, national
emergencies, labor difficulties, fire, mechanical breakdown, flood or
catastrophe, Acts of God, insurrection, war, riots or failure of communication
or power supply.
12. Indemnification.
---------------
12.1 Indemnification of the Organization. The Corporation will indemnify
-----------------------------------
and hold the Organization harmless from all
-7-
<PAGE>
losses, claims, damages, liabilities or expenses (including reasonable counsel
fees and expenses) from any claim, demand, action or suit (collectively,
"Claims") arising in connection with material misstatements or omissions in the
Corporation's Prospectus. Notwithstanding anything herein to the contrary, the
Corporation will indemnify and hold the Organization harmless from any and all
losses, claims, damages, liabilities or expenses (including reasonable counsel
fees and expenses) resulting from any Claim as a result of its acting in
accordance with any written instructions reasonably believed by the Organization
to have been executed by any person duly authorized by the Corporation, or as a
result of acting in reliance upon any instrument or stock certificate reasonably
believed by the Organization to have been genuine and signed, countersigned or
executed by a person duly authorized by the Corporation, excepting only the
negligence or bad faith of the Organization.
In any case in which the Corporation may be asked to indemnify or hold the
Organization harmless, the Corporation shall be advised of all pertinent facts
concerning the situation in question and the Organization shall use reasonable
care to identify and notify the Corporation promptly concerning any situation
which presents or appears likely to present a claim for indemnification against
the Corporation. The Corporation shall have the option to defend the
Organization against any Claim which may be the subject of indemnification
hereunder. In the event that the Corporation elects to defend against such
Claim, the defense shall be conducted by counsel chosen by the Corporation and
satisfactory to the Organization. The Organization may retain additional
counsel at its expense. Except with the prior written consent of the
Corporation, the Organization shall not confess any Claim or make any compromise
in any case in which the Corporation will be asked to indemnify the
Organization.
12.2 Indemnification of the Corporation. Without limiting the rights of
----------------------------------
the Corporation under applicable law, the Organization will indemnify and hold
the Corporation harmless from all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) from any Claim (a)
arising from (i) the bad faith or negligence of the Organization, its officers,
employees or agents, (ii) any breach of applicable law by the Organization, its
officers, employees or agents, (iii) any action of the Organization, its
officers, employees or agents which exceeds the legal authority of the
Organization or its authority hereunder, or (iv) any actions, inactions, errors
or omissions of the Organization, its officers, employees or agents with respect
to the purchase, redemption, transfer and registration of Customers' Shares or
the
-8-
<PAGE>
Corporation's verification or guarantee of any Customer signature.
In any case in which the Organization may be asked to indemnify or hold the
Corporation harmless, the Organization shall be advised of all pertinent facts
concerning the situation in question and the Corporation shall use reasonable
care to identify and notify the Organization promptly concerning any situation
which presents or appears likely to present a claim for indemnification against
the Organization. The Organization shall have the option to defend the
Corporation against any Claim which may be the subject of indemnification
hereunder. In the event that the Organization elects to defend against such
Claim, the defense shall be conducted by counsel chosen by the Organization and
satisfactory to the Corporation. The Corporation may retain additional counsel
at its expense. Except with the prior written consent of the Organization, the
Corporation shall not confess any Claim or make any compromise in any case in
which the Organization will be asked to indemnify the Corporation.
12.3 Survival of Indemnities. The indemnities granted by the parties in
-----------------------
this Section 12 shall survive the termination of this Agreement.
13. Notices. All notices or other communications hereunder to either party
-------
shall be in writing and shall be deemed sufficient if mailed to such party at
the address of such party set forth on the signature page of this Agreement or
at such other address as such party may have designated by written notice to the
other.
14. Further Assurances. Each party agrees to perform such further acts
------------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
15. Termination. Unless sooner terminated, this Agreement will continue
-----------
until July 31, 1995 and thereafter will continue automatically for successive
annual periods provided such continuance is specifically approved at least
annually by vote of a majority of (i) the Board of Directors of the Corporation
and (ii) those Directors who are not "interested persons" (as defined in the
1940 Act) of the Corporation and have no direct or indirect financial interest
in the operation of the Corporation's Administrative Services Plan or in any
agreement related thereto cast in person at a meeting called for the purpose of
voting on such approval ("Disinterested Directors"). This Agreement is
terminable, without penalty, at any time by the Corporation (which termination
may be by a vote of a majority of the Disinterested Directors) or by you upon
notice to the Corporation.
-9-
<PAGE>
16. Changes; Amendments. This Agreement may be changed or amended only by
-------------------
written instrument signed by both parties hereto.
17. Subcontracting By Organization. The Organization may, with the
------------------------------
written approval of the Corporation (such approval not to be unreasonably
withheld), subcontract for the performance of the Organization's obligations
hereunder with any one or more persons, including but not limited to any one or
more persons which is an affiliate of the Organization; provided, however, that
the Organization shall be as fully responsible to the Corporation for the acts
and omissions of any subcontractor as it would be for its own acts or omissions.
18. Compliance with Laws and Policies; Cooperation. The Corporation
----------------------------------------------
hereby agrees that it will comply with all laws and regulations applicable to
its operations and the Organization agrees that it will comply with all laws and
regulations applicable to its operations hereunder. Each party understands that
the other may from time to time adopt or modify policies relating to the subject
matter of this Agreement, in which case the party adopting or modifying such a
policy shall notify the other thereof and the parties shall consider the
applicability thereof and endeavor to comply therewith to the extent not
impracticable or unreasonably burdensome. Each of the parties agrees to
cooperate with the other in connection with the performance of this Agreement
and the resolution of any problems, questions or disagreements in connection
herewith.
18.1 Annual Financial Reports. At least once a year, the Corporation
------------------------
shall send to the record owners of its shares the Corporation's audited
financial statements.
18.2 Annual Certification. At least once a year, the Organization shall
--------------------
certify to the Corporation that it is conducting its business in accordance with
the terms and conditions of the Agreement.
19. Single Portfolio. Notwithstanding anything in this Agreement to the
----------------
contrary, any amount owed by Corporation to the Organization under this
Agreement or otherwise with respect to any matter hereunder shall be paid only
from and shall be limited to the assets and property of the particular
investment portfolio of the Corporation to which the matter relates.
20. Miscellaneous. This Agreement shall be construed and enforced in
-------------
accordance with and governed by the laws of the State of Maryland. The captions
in this Agreement are included for convenience of reference only and in no way
define or limit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement may be executed simultaneously in two
-10-
<PAGE>
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument. The terms of
this Agreement shall become effective as of the date set forth below.
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have caused this Agreement to be executed and delivered in their names
and on their behalf by the undersigned, thereunto duly authorized, all as of the
day and year set forth below.
Dated as of: ___________________
UST Master Funds, Inc. Address for Notices:
_________________________
_________________________
_________________________
By: ___________________________ _________________________
(Authorized Officer)
_________________________________ Address for Notices:
[Service Organization] ________________________
________________________
________________________
________________________
By: _______________________________
(Authorized Officer)
-11-
<PAGE>
APPENDIX A
----------
UST MASTER FUNDS, INC.
Pursuant to the terms and conditions set forth in the attached Shareholder
Servicing Agreement, the Organization will receive the fees set forth below in
consideration for the services described in Section 2 of said Agreement and the
incurring of expenses in connection therewith, such fees (calculated pursuant to
Section 3.1 of said Agreement) to be paid in arrears periodically (but in no
event less frequently than semi-annually):
<TABLE>
<CAPTION>
======================================================
FUND Shareholder
Servicing
Fee
======================================================
<S> <C>
Money Fund __ BP
Government Money Fund __ BP
Treasury Money Fund __ BP
======================================================
Short-Term Government Securities Fund __ BP
Intermediate-Term Managed Income Fund __ BP
Managed Income Fund __ BP
======================================================
Equity Fund __ BP
Income and Growth Fund __ BP
Long-Term Supply of Energy Fund __ BP
Productivity Enhancers Fund __ BP
Environmentally-Related Products and
Services Fund __ BP
Aging of America Fund __ BP
Communication and Entertainment Fund __ BP
Business and Industrial Restructuring
Fund __ BP
Global Competitors Fund __ BP
Early Life Cycle Fund __ BP
International Fund __ BP
Emerging Americas Fund __ BP
Pacific/Asia Fund __ BP
Pan European Fund __ BP
======================================================
</TABLE>
-12-
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in each Prospectus and "Financial Statements" and "Independent
Auditors" in each Statement of Additional Information and to the incorporation
by reference in Post-Effective Amendment Number 18 to the Registration Statement
(Form N-1A No. 2-93068) of UST Master Tax-Exempt Funds, Inc. of our report dated
May 19, 1995 on the financial statements and financial highlights included in
the 1995 Annual Report.
ERNST & YOUNG LLP
Boston, Massachusetts
July 26, 1995
<PAGE>
EXHIBIT 11(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our
Firm under the caption "Counsel" in the Statements of Additional Information
that are included in Post-Effective Amendment Nos. 21 and 23 to the Registration
Statement (Nos. 2-92665; 811-4088) on Form N-1A of UST Master Funds, Inc. under
the Securities Act of 1933 and the Investment Company Act of 1940, respectively.
This consent does not constitute a consent under Section 7 of the Securities Act
of 1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under Section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/DRINKER BIDDLE & REATH
-------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
July 31, 1995
<PAGE>
Exhibit 15
UST MASTER TAX-EXEMPT FUNDS, INC.
AMENDED AND RESTATED DISTRIBUTION PLAN
--------------------------------------
__________, 1995
This Distribution Plan (the "Plan") has been adopted by the Board of
Directors of UST Master Tax-Exempt Funds, Inc. (the "Company") in conformance
with Rule 12b-l under the Investment Company Act of 1940 (the "Act").
Section 1. Payments. The Company may reimburse its Distributor (or any
---------- --------
other person) for certain expenses that are incurred in connection with the
offering and sale of Special Series 1 shares of each of the Company's Funds (all
such shares, hereinafter called "Shares" and all such Funds hereinafter called
"Funds"). Reimbursements by the Company under the Plan will be calculated daily
and paid monthly at a rate or rates set from time to time by the Company's Board
of Directors, provided that no rate set by the Board for any Fund may exceed the
annual rate of .75% of the average daily net asset value of Shares of such Fund.
For purposes of determining the reimbursements payable under the Plan, the net
asset value of the outstanding Shares of the respective Fund shall be computed
in the manner specified in the Company's prospectuses and statements of
additional information for such Shares.
Section 2. Expenses Covered by Plan. Payments to the Distributor under
---------- ------------------------
Section 1 of the Plan will be to reimburse the Distributor for its expenses in
connection with services intended to result in the sale of the Shares. Such
services may include but are not limited to: (a) direct out-of-pocket
promotional expenses incurred by the Distributor in connection with the
advertising and marketing of Shares; and (b) payments to one or more securities
dealers, financial institutions or other industry professionals and financial
intermediaries, such as but not limited to investment advisers, accountants and
estate planning firms that are not affiliated with the Distributor (severally, a
"Distribution Organization") for distribution assistance. As used herein,
"direct out-of-pocket promotional expenses" include without limitation amounts
spent by the Distributor in connection with advertising via radio, television,
newspapers, magazines and otherwise; preparing, printing and mailing sales
materials, brochures and prospectuses (except for prospectuses used for
regulatory purposes or for distribution to existing shareholders); and other
out-of-pocket expenses incurred in connection with the promotion of the Shares.
Payments made by a particular Fund must be for distribution services
rendered for or on behalf of such Fund. However, joint distribution financing
with respect to Shares of the Funds (which financing may also involve other
investment portfolios or
<PAGE>
companies that are affiliated persons of such a person, or affiliated persons of
the Distributor) shall be permitted in accordance with applicable regulations of
the Securities and Exchange Commission as in effect from time to time.
Upon proper authorization by the Company's Directors in accordance with
Rule 12b-l under the Act, expenses covered by the Plan may also include other
expenses the Distributor (or any other person) may incur in connection with the
distribution of the Shares including, without limitation, expenditures for
telephone facilities and in-house telemarketing.
Section 3. Reports of Distributor. So long as the Plan is in effect, the
---------- ----------------------
Distributor shall provide to the Company's Board of Directors, and the Directors
shall review, at least quarterly, a written report of the amounts expended
pursuant to the Plan and the purposes for which such expenditures were made.
Section 4. Approval of Plan. The Plan will become effective immediately,
---------- ----------------
as to any series of Shares, upon its approval by (a) a majority of the
outstanding Shares of such series, and (b) a majority of the Board of Directors,
including a majority of the Directors who are not "interested persons" (as
defined in the Act) of the Company and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements entered into in
connection with the Plan, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the approval of the Plan.
Section 5. Continuance of Plan. The Plan shall continue in effect for so
---------- -------------------
long as its continuance is specifically approved at least annually by the
Company's Board of Directors in the manner described in Section 4.
Section 6. Amendments. The Plan may be amended at any time by the Board
---------- ----------
of Directors provided that (a) any amendment to increase materially the costs
which any series of Shares may bear for distribution pursuant to the Plan shall
be effective only upon approval by a vote of a majority of the outstanding
Shares of such series, and (b) any material amendments of the terms of the Plan
shall become effective only upon approval as provided in paragraph 4(b) hereof.
Section 7. Termination. The Plan is terminable, as to any series of
---------- -----------
Shares, without penalty at any time by (a) a vote of a majority of the Directors
who are not "interested persons" (as defined in the Act) of the Company and who
have no direct or indirect financial interest in the operation of the Plan or in
any agreements entered into in connection with the Plan, or (b) a vote of a
majority of the outstanding Shares of such series.
<PAGE>
Section 8. Selection/Nomination of Directors. While this Plan is in
---------- ---------------------------------
effect, the selection and nomination of those Directors who are not "interested
persons" (as defined in the Act) of the Company shall be committed to the
discretion of such non-interested Directors.
Section 9. Miscellaneous. The captions in this Agreement are included for
---------- -------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the Company has executed the Plan as of __________,
1995 on behalf of each of the Funds.
UST MASTER TAX-EXEMPT FUNDS, INC.
By:_____________________________
President
<PAGE>
DISTRIBUTION AGREEMENT
Gentlemen:
We wish to enter into this Distribution Agreement ("Agreement") with
you concerning the provision of distribution services in connection with Special
Series 1 shares ("Shares") of each of the Funds offered by UST Master Tax-Exempt
Funds, Inc. (the "Company"), of which we are the principal underwriter as
defined in the Investment Company Act of 1940 (the "Act") and the exclusive
agent for the continuous distribution of said Shares.
The terms and conditions of this Agreement are as follows:
Section 1. You agree to provide reasonable assistance in connection
with the distribution of Shares to your Clients as requested from time to time
by us, which assistance may include without limitation forwarding sales
literature and advertising provided by us for Clients, and such other similar
services as we may reasonably request to the extent you are permitted to do so
under applicable statutes, rules and regulations.
Section 2. You will provide such office space and equipment,
telephone facilities and personnel (which may be any part of the space,
equipment and facilities currently used in your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide the aforementioned services and assistance to Clients.
Section 3. Neither you nor any of your officers, employees or agents
are authorized to make any representations concerning us or the Shares except
those contained in the Company's applicable prospectuses and statements of
additional information for the Shares, copies of which will be supplied by us to
you, or in such supplemental literature or advertising as may be authorized by
us in writing.
Section 4. For all purposes of this Agreement you will be deemed to
be an independent contractor, and will have no authority to act as agent for us
or the Company in any matter or in any respect. By your written acceptance of
this Agreement, you agree to and do release, indemnify and hold us harmless and
the Company harmless from and against any and all direct or indirect liabilities
or losses resulting from requests, directions, actions or inactions of or by you
or your officers, employees or agents regarding your responsibilities hereunder
or the purchase, redemption, transfer of registration of Shares (or orders
relating to the same) by or on behalf of Clients. You and your employees will,
upon request, be available during normal business hours to consult with us or
our designees concerning the performance of your responsibilities under this
Agreement.
<PAGE>
Section 5. In consideration of the services and facilities provided
by you hereunder, we will pay to you, and you will accept as full payment
therefor, a fee at the annual rate of __% of the average daily net asset value
of the Shares beneficially owned by your Clients for whom you are the dealer of
record or holder of record (the "Clients' Shares"), which fee will be computed
daily and payable monthly. For purposes of determining the fees payable under
this Section 5, the average daily net asset value of the Clients' Shares will be
computed in the manner specified in the Company's Registration Statement (as the
same is in effect from time to time) in connection with the computation of the
net asset value of the particular Shares involved for purposes of purchases and
redemptions. The fee rate stated above may be prospectively increased or
decreased by us, in our sole discretion, at any time upon notice to you.
Further, we may, in our discretion and without notice, suspend or withdraw the
sale of Shares, including the sale of Shares for the account of any Client or
Clients.
Section 6. Any person authorized to direct the disposition of monies
paid or payable by us pursuant to this Agreement will provide to us and the
Company, and the Company's Directors will review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made. In addition, you will furnish us or our designees with such
information as we or they may reasonably request (including, without limitation,
periodic certifications confirming the provision to Clients of the services
described herein), and will otherwise cooperate with us and our designees
(including, without limitation, any auditors designated by us), in connection
with the preparation of reports to the Company's Board of Directors concerning
this Agreement and the monies paid or payable by us pursuant hereto, as well as
any other reports or filings that may be required by law.
Section 7. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you
represent, warrant and agree that this Agreement has been entered into pursuant
to Rule 12b-1 under the Act, and is subject to the provisions of said Rule, as
well as any other applicable rules or regulations promulgated by the Securities
and Exchange Commission.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue until October 24, 199__ and thereafter
will continue automatically for successive annual periods provided such
continuance is specifically approved at least annually by the Company in the
manner described in Section 12. This Agreement is
-2-
<PAGE>
terminable with respect to any series of Shares, without penalty, at any time by
the Company (which termination may be by a vote of a majority of the
Disinterested Directors as defined in Section 12 or by vote of the holders of a
majority of the outstanding Shares of such series) or by us or you upon notice
to the other party hereto. This Agreement will also terminate automatically in
the event of its assignment (as defined in the Act).
Section 10. All notices and other communications to either you or us
will be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address stated herein, or to such
other address as either party shall so provide the other.
Section 11. This Agreement will be construed in accordance with the
laws of the State of Maryland.
Section 12. This Agreement has been approved by vote of a majority of
(i) the Company's Board of Directors and (ii) those Directors of the Company who
are not "interested persons" (as defined in the Act) of the Company and have no
direct or indirect financial interest in the operation of the Distribution Plan
adopted by the Company regarding the provision of distribution services in
connection with the Shares or in any agreement related thereto cast in person at
a meeting called for the purpose of voting on such approval ("Disinterested
Directors").
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated
-3-
<PAGE>
below and promptly return it to us, at the following address:
____________________________________________________________.
Very truly,
_____________________________
By: ________________________
Date: _______________ (Authorized Officer)
Accepted and Agreed to:
[Distribution Organization]
By: _____________________
Date: _______________ (Authorized Officer)
Address of Distribution _________________________
Organization _________________________
_________________________
-4-
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