EXCELSIOR TAX EXEMPT FUNDS INC, 497, 1996-08-14

EXCELSIOR TAX EXEMPT FUNDS INC
497, 1996-08-14

Previous: PRUDENTIAL REALTY ACQUISITION FUND II LP, 10-Q, 1996-08-14

Next: NEW ENGLAND COMMUNITY BANCORP INC, 10-Q, 1996-08-14

<PAGE>

EXCELSIOR FUNDS, INC.

Money Fund
Government Money Fund
Treasury Money Fund

EXCELSIOR TAX-EXEMPT FUNDS, INC.

Tax-Exempt Money Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1996

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 Excelsior Funds, Inc. ("Excelsior Fund") and the
Tax-Exempt Money Fund of Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt
Fund") dated August 1, 1996 (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 Excelsior Funds c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by
calling (800) 446-1012.
<PAGE>

TABLE OF CONTENTS
-----------------

Page
----

INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . 1

Additional Information on Portfolio Instruments . 1
Additional Investment Limitations. . . . . . . . . 6

NET ASSET VALUE AND NET INCOME . . . . . . . . . . . . 10

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . 11

INVESTOR PROGRAMS . . . . . . . . . . . . . . . . . . . 12

Systematic Withdrawal Plan . . . . . . . . . . . . 12
Exchange Privilege . . . . . . . . . . . . . . . . 13
Other Investor Programs . . . . . . . . . . . . . 14

DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . 14

MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . 16

Directors and Officers . . . . . . . . . . . . . . 16
Investment Advisory and
Administration Agreements . . . . . . . . . . . 20
Service Organizations . . . . . . . . . . . . . . 22
Expenses . . . . . . . . . . . . . . . . . . . . . 24
Custodian and Transfer Agent . . . . . . . . . . . 24

PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . 26

INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . 28

COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . 28

ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . 28

Generally . . . . . . . . . . . . . . . . . . . . 28
Tax-Exempt Money Fund . . . . . . . . . . . . . . 29

YIELD INFORMATION . . . . . . . . . . . . . . . . . . . 30

MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 32

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 32

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . A-1

(i)
<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 Excelsior Fund (collectively, the "Taxable Funds") and the Tax-
Exempt Money Fund of Excelsior Tax-Exempt Fund (the portfolios are referred to
individually as a "Fund" and collectively as the "Funds"; Excelsior Fund and
Excelsior 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 Tax-Exempt Money Fund is to
seek a moderate level of current interest income exempt from Federal income
taxes consistent with stability of principal. The Tax-Exempt Money 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 will be computed in accordance with guidelines established by
the SEC.
<PAGE>

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 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

-2-
<PAGE>

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 Tax-Exempt Money 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 Tax-Exempt Money 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 Tax-Exempt Money 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 Tax-Exempt Money 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 Tax-Exempt
Money Fund has paid any consideration directly or indirectly for a "stand-by
commitment," its cost will be reflected as unrealized depreciation for the
period during which the commitment was held by the Fund.

The Tax-Exempt Money Fund intends to enter into "stand-by commitments"
only with banks and broker/dealers which, in the

-3-
<PAGE>

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 Tax-Exempt Money 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 construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses, and the
extension of loans to public institutions and facilities. Private activity
bonds that are issued by or on behalf of public authorities to finance various
privately operated facilities are included within the term "Municipal
Securities" only if the interest paid thereon is exempt from regular Federal
income tax and not treated as a specific tax preference item under the Federal
alternative minimum tax.

The two principal classifications of Municipal Securities are "general
obligations" and "revenue" issues, but the Tax-Exempt Money 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 Tax-Exempt Money Fund should continue to hold the
obligation.

The payment of principal and interest on most securities purchased by
the Tax-Exempt Money Fund will depend upon the

-4-
<PAGE>

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 Tax-Exempt Money 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
investor's Federal alternative minimum taxable income, and corporate investors
must treat all tax-exempt interest as an item

-5-
<PAGE>

of tax preference. Excelsior 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 Tax-Exempt Money
Fund and the liquidity and value of its portfolio. In such an event, Excelsior
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 Securities 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 Excelsior
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 Tax-Exempt Money Fund of Municipal Securities or other
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;

3. Purchase or sell real estate, except that each Taxable Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by

-6-
<PAGE>

interests in real estate; and except that the Tax-Exempt Money Fund may invest
in Municipal Securities secured by real estate or interests therein;

4. Purchase or sell commodities or commodity contracts, 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 predecessor, 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 Tax-Exempt Money Fund may not:

16. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;

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 Tax-Exempt Money Fund has invested more than 20% of the value of
its assets in taxable securities on a temporary defensive basis, the industry
diversification limitation in Investment Limitation No. 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.

Each Company reserves the right to honor any request for redemption or
repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value. If payment is made
in securities, a shareholder may incur transaction costs in converting these
securities into cash. Such redemptions in kind will be governed by Rule 18f-1
under the 1940 Act so that a Fund is obligated to redeem its Shares solely in
cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder of a Fund.

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

-12-
<PAGE>

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 Chase Global Funds Services
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 any other portfolio of the
Companies or for Trust Shares of Excelsior Institutional Trust. Shares may be
exchanged by wire, telephone or mail and must be made to accounts of identical
registration. There is no exchange fee imposed by the Companies or Excelsior
Institutional Trust. In order to prevent abuse of this privilege to the
disadvantage of other shareholders, the Companies and Excelsior Institutional
Trust reserve the right to limit the number of exchange requests of Investors
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.

-13-
<PAGE>

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 Money Funds may also be purchased in connection
with certain Retirement Programs.

DESCRIPTION OF CAPITAL STOCK
----------------------------

Excelsior Fund's Charter authorizes its Board of Directors to issue up
to 35 billion full and fractional shares of capital stock; and Excelsior 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 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,

-14-
<PAGE>

except as otherwise required by the 1940 Act or other applicable law or when the
matter to be voted upon affects only the interests of the shareholders of a
particular class. Voting rights are not cumulative and, accordingly, the
holders of more than 50% of a Company's aggregate outstanding shares may elect
all of that Company's directors, regardless of the votes of other shareholders.

Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants, 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

-15-
<PAGE>

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.

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:
<TABLE>
<CAPTION>
Position Principal Occupation
with the During Past 5 Years and
Name and Address Companies Other Affiliations
- ---------------- --------- -----------------------
<S> <C> <C>

Alfred C. Tannachion/1/ Chairman of the Retired; Chairman of the
1135 Hyde Park Court Board, President Boards, President and
Mahwah, NJ 07430 and Treasurer Treasurer of Excelsior Fund and
Age: 70 Excelsior Tax-Exempt;
Chairman of the Board,
President and Treasurer of
UST Master Variable Series,
Inc. (since 1994); Chairman
of the Board, President and
Treasurer of Excelsior
Institutional Trust (since
1995).

Donald L. Campbell Director Retired; Director of
333 East 69th Street Excelsior Fund and Excelsior
Apt. 10-H Tax-Exempt; Director of UST
New York, NY 10021 Master Variable Series,
Age: 70 Inc. (since 1994); Trustee of
Excelsior Institutional Trust
(since 1995); Director, Royal
Life Insurance Co. of NY
(since 1991).
</TABLE>

- ---------------------------
1 This director is considered to be an "interested person" of Excelsior Fund
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>

Joseph H. Dugan Director Retired; Director of
913 Franklin Lakes Road Excelsior Fund and Excelsior
Franklin Lakes, NJ 07417 Tax-Exempt; Director of UST
Age: 71 Master Variable Series, Inc.
(since 1994); Trustee of
Excelsior Institutional Trust
(since 1995).

Wolfe J. Frankl Director Retired; Director of
2320 Cumberland Road Excelsior Fund and Excelsior Tax-
Charlottesville, VA 22901 Exempt; Director of UST
Age: 75 Master Variable Series, Inc.
(since 1994); Trustee of
Excelsior Institutional Trust
(since 1995); Director, Deutsche
Bank Financial, Inc. (since
1989); Director, The Harbus
Corporation (since 1951);
Trustee, HSBC Funds Trust and
HSBC Mutual Funds Trust (since
1995).

Robert A. Robinson Director Director of Excelsior Fund and
Church Pension Fund Excelsior Tax-Exempt;
800 Second Avenue Director of UST Master
New York, NY 10017 Variable Series, Inc. (since
Age: 70 1994); Trustee of Excelsior
Institutional Trust (since
1995); President Emeritus, The
Church Pension Fund and its
affiliated companies (since
1968); Trustee, H.B. and F.H.
Bugher Foundation and Director
of its wholly owned subsidiaries
-- Rosiclear Lead and Flourspar
Mining Co. and The Pigmy
Corporation (since 1984);
Director, Morehouse Publishing
Co. (since 1974); Trustee, HSBC
Funds Trust and HSBC Mutual
Funds Trust (since 1982);
Director, Infinity Funds, Inc.
(since 1995).

</TABLE>

-17-
<PAGE>

<TABLE>
<CAPTION>
Position Principal Occupation
with the During Past 5 Years and
Name and Address Companies Other Affiliations
- ---------------- --------- -----------------------
<S> <C> <C>

Frederick S. Wonham/1/ Director Retired; Director of Excelsior Fund
238 June Road and Excelsior Tax-Exempt;
Stamford, CT 06903 Trustee of Excelsior Funds and
Age: 65 Excelsior Institutional Trust
(since 1995); Vice Chairman of
U.S. Trust Corporation and U.S.
Trust Company of New York (until
September, 1995); Chairman, U.S.
Trust of Connecticut.

W. Bruce McConnel, III Secretary Partner of the law firm of
Philadelphia National Drinker Biddle & Reath.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 53

Sherry Aramini Assistant Second Vice President, Blue
Chase Global Funds Secretary Sky Compliance Manager,
Services Company Chase Global Funds Services
73 Tremont Street Company since May 1996;
Boston, MA 02108-3913 Technical Resource Manager,
Age: 32 Chase Global Funds Services
Company, April 1995-May 1996;
Financial Reporting Supervisor,
Chase Global Funds Services Company,
September 1993-April 1995; Audit
Supervisor, Coopers & Lybrand L.L.P.,
July 1990-August 1993.

John M. Corcoran Assistant Vice President, Director of
Chase Global Funds Treasurer Administration, Client Group,
Services Company Chase Global Funds Services
73 Tremont Street Company (July 1996-present);
Boston, MA 02108-3913 Second Vice President, Manager
Age: 31 of Administration, Chase Global
Funds Services Company (October 1993-
July 1996); Audit Manager, Ernst &
Young LLP (from August 1987 to
September 1993).
</TABLE>

- -----------------------------
1. This director is considered to be an "interested person" of Excelsior
Fund as defined in the 1940 Act.

-18-
<PAGE>

of which Mr. McConnel is a partner, receives legal fees as counsel to the
Companies. The employees of Chase Global Funds Services 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. As of July
15, 1996, the directors and officers of each Company as a group owned
beneficially less than 1% of the outstanding Shares of each Fund of the Company,
and less than 1% of the outstanding Shares of all Funds of the Company in the
aggregate.

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 each Company Expenses to Directors
--------------- ----------------- -------- ------------------
<S> <C> <C> <C>

Donald L. Campbell $16,500 None $39,500(4)**
Director

Joseph H. Dugan $16,500 None $39,500(4)**
Director

Wolfe J. Frankl $16,500 None $39,500(4)**
Director

Robert A. Robinson $16,500 None $39,500(4)**
Director

Alfred C. Tannachion $21,500 None $51,500(4)**
Chairman of the Boards,
President and Treasurer

Frederick S. Wonham+ $ 6,375 None $14,424(4)**

</TABLE>
- ---------------------------

/*/ The "Fund Complex" consists of Excelsior Funds, Inc., Excelsior Tax-Exempt
Funds, Inc., UST Master Variable Series, Inc., Excelsior Funds and
Excelsior Institutional Trust.

-19-
<PAGE>

/**/ Number of investment companies in the Fund Complex for which director
services as director or trustee.

/+/ Frederick S. Wonham was elected to the Board of Directors of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. on November 17, 1995.

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, 1994, Excelsior 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, Excelsior Tax-Exempt Fund paid the Investment Adviser $1,697,812 with
respect to the Tax-Exempt Money 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 Tax-
Exempt Money Funds, respectively.

For the fiscal year ended March 31, 1995, Excelsior 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, Excelsior Tax-Exempt Fund paid the Investment Adviser $1,698,879 with
respect to the Tax-Exempt Money 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 Tax-
Exempt Money Funds, respectively.

For the fiscal year ended March 31, 1996, Excelsior Fund paid the
Investment Adviser $1,291,496, $1,224,338 and $621,988 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Excelsior Tax-Exempt Fund paid the Investment Adviser $1,745,649 with
respect to the Tax-Exempt Money Fund. For the fiscal year ended March 31, 1996,
the Investment Adviser waived fees totalling $227,463, $172,140, $46,887 and
$353,419 with respect to the Money, Government Money, Treasury Money and Tax-
Exempt Money Funds, respectively.

-20-
<PAGE>

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.

Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services, an affiliate of the Distributor, and U.S. Trust (the
"Administrators") serve as the Funds' administrators. 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.

Prior to August 1, 1995, administrative services were provided to the
Funds by CGFSC and Concord Holding Corporation (collectively, the "former
administrators") under administration agreements having substantially the same
terms as the Administration Agreements currently in effect.

For the fiscal year ended March 31, 1994, Excelsior Fund paid the
former 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, Excelsior Tax-Exempt Fund paid the former administrators
$1,060,325 in the aggregate with respect to the Tax-Exempt Money Fund. For the
fiscal year ended March 31, 1994, the former 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, Excelsior Fund paid the
former 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

-21-
<PAGE>

the same period, Excelsior Tax-Exempt Fund paid the former administrators
$1,193,896 in the aggregate with respect to the Tax-Exempt Money Fund. For the
fiscal year ended March 31, 1995, the former administrators waived fees
totalling $1,087 and $351 with respect to the Government Money and Treasury
Money Funds, respectively.

For the period April 1, 1995 through July 31, 1995, Excelsior Fund
paid the former administrators $450,305, $403,443 and $107,685 in the aggregate
with respect to the Money Fund, Government Money Fund and Treasury Money Fund,
respectively. For the same period, Excelsior Tax-Exempt Fund paid the former
administrators $407,281 in the aggregate with respect to the Tax-Exempt Money
Fund. For the period April 1, 1995 through July 31, 1995, the former
administrators waived fees totalling $135 with respect to the Government Money
Fund.

For the period August 1, 1995 through March 31, 1996, Excelsior Fund
paid the Administrators $487,151, $457,681, and $236,672 in the aggregate with
respect to the Money Fund, Government Money Fund and Treasury Money Fund,
respectively. For the same period, Excelsior Tax-Exempt Fund paid the
Administrators $889,555 in the aggregate with respect to the Tax-Exempt Money
Fund. For the period August 1, 1995 through March 31, 1996, the Administrators
waived fees totalling $705 with respect to the Government Money Fund.

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 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

-22-
<PAGE>

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, 1996, 1995 and 1994, payments to
Service Organizations totalled $227,463, $204,060 and $14,775; $172,980,
$174,408 and $21,258; $46,887, $45,717 and $2,062; and $353,419, $236,867 and
$20,732 with respect to the Money, Government Money, Treasury Money and Tax-
Exempt Money Funds, respectively. Of these respective amounts, $227,463,
$203,572 and $14,775; $168,064, $171,257 and $20,233; $46,887, $44,596 and
$1,075; and $353,419, $236,399 and $20,732 were paid to affiliates of U.S. Trust
with respect to the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds.

-23-
<PAGE>

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
1/2% of average annual net assets in excess of $100 million.

Custodian and Transfer Agent
- ----------------------------

The Chase Manhattan Bank, N.A. ("Chase") serves as custodian of the
Funds' assets. Under the custodian agreements, Chase has agreed to (i) maintain
a separate account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive all
income and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to the Companies' Boards of Directors concerning the
Funds' operations.

-24-
<PAGE>

Chase may, at its own expense, open and maintain custody accounts with respect
to the Funds with other banks or trust companies, provided that Chase shall
remain liable for the performance of all its custodial duties under the
Custodian Agreements, notwithstanding any delegation.

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 its meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to the Companies concerning
each 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, 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 transfer agency duties under the Transfer Agency Agreements, notwithstanding
any delegation. Pursuant to this provision in the agreement, U.S. Trust has
entered into a sub-transfer agency arrangement with CGFSC, an affiliate of
Chase, with respect to accounts of shareholders who are not Customers of U.S.
Trust. For the services provided by CGFSC, U.S. Trust has agreed to pay CGFSC
$15.00 per annum per account or subaccount plus out-of-pocket expenses. CGFSC
receives no fee directly from the Companies for any of its sub-transfer agency
services.

-25-
<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

-26-
<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, 1996, the following Funds held the following securities of
Excelsior Fund's regular brokers or dealers or their parents: (a) the Money
Fund held the following securities: repurchase agreement with Dillon Read &
Co., Inc. in the principal amount of $8,835,594, and commercial paper of Merrill
Lynch & Co., Inc. in the principal amount of $16,781,833; and (b) the Government
Money Fund held the following security: repurchase agreement with

-27-
<PAGE>

Dillon Read & Co., Inc. in the principal amount of $13,387,835. Dillon Read &
Co., Inc. and Merrill Lynch & Co., Inc., are considered to be regular
brokers or dealers of Excelsior Fund. As of March 31, 1996, Excelsior Tax-
Exempt Fund held no securities of Excelsior Tax-Exempt Fund's regular brokers or
dealers or 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, 1996 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.

-28-
<PAGE>

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.

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."

Tax-Exempt Money Fund
- ---------------------

The Tax-Exempt Money Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Exempt Money 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 Tax-Exempt Money Fund
dividends being tax-exempt, but such dividends would be ultimately taxable to
the beneficiaries when distributed to them. In addition, the Tax-Exempt Money
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 Tax-Exempt Money 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

-29-
<PAGE>

exempt-interest obligations at the close of each quarter of its taxable year.
Within 60 days after the close of the taxable year, the Tax-Exempt Money 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 Tax-Exempt Money
Fund cannot exceed the excess of the amount of interest exempt from tax under
Section 103 of the Code received by the Tax-Exempt Money 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 Tax-Exempt Money
Fund with respect to any taxable year which qualifies as exempt-interest
dividends will be the same for all shareholders receiving dividends from the
Tax-Exempt Money Fund for such year.

Interest on indebtedness incurred by a shareholder to purchase or
carry the Tax-Exempt Money Fund's Shares generally is not deductible for Federal
income tax purposes.

Excelsior Tax-Exempt Fund intends to distribute to shareholders of the
Tax-Exempt Money Fund any investment company taxable income earned by the Tax-
Exempt Money Fund for each taxable year. In general, the Tax-Exempt Money
Fund's investment company taxable income will be its taxable income (including
taxable interest and short-term capital gains) subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. Such distributions
will be taxable to the shareholders as ordinary income (whether paid in cash or
additional Shares).

* * *

The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. 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

-30-
<PAGE>

the value of an account in each of the Funds includes the value of additional
Shares purchased with dividends from the original Share and dividends declared
on both the original Share and any such additional Shares, net of all fees that
are charged to all shareholder accounts and to the particular series of Shares
in proportion to the length of the base period, other than nonrecurring account
or any sales charges. For any account fees that vary with the size of the
account, the amount of fees charged is computed with respect to the Fund's mean
(or median) account size. The capital changes to be excluded from the
calculation of the net change in account value are realized gains and losses
from the sale of securities and unrealized appreciation and depreciation. In
addition, each Fund may use effective compound yield quotations for its Shares
computed by adding 1 to the unannualized base period return (calculated as
described above), raising the sums to a power equal to 365 divided by 7, and
subtracting 1 from the results.

From time to time, in advertisements, sales literature or in reports
to shareholders, the yields of each Money Market Fund's Shares may be quoted and
compared to those of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, the yield of such a Fund's
Shares may be compared to the Donoghue's Money Fund average, which is an average
compiled by Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
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) 446-1012. For the seven-day period ended March 31, 1996, the annualized
yields for Shares of the Money Fund, Government Money Fund, Treasury Money Fund
and Tax-Exempt Money Fund were 4.86%, 4.82%, 4.69% and 2.90%, respectively, and
the effective yields for Shares of such respective Funds were 4.98%, 4.94%,
4.80% and 2.93%.

The "tax-equivalent" yield of the Tax-Exempt Money Fund is computed
by: (a) dividing the portion of the yield (calculated as above) that is exempt
from Federal income tax by one minus a stated Federal income tax rate and (b)
adding that figure to that portion, if any of the yield that is not exempt from
Federal income tax. Tax-equivalent yields assume the payment of Federal income
taxes at a rate of 31%.

-31-
<PAGE>

Based on the foregoing calculation, the annualized tax-equivalent
yield of the Tax-Exempt Money Fund for the seven-day period ended March 31, 1996
was 4.24%.

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 25, 1996, U.S. Trust held of record substantially all of
the outstanding Shares in the Funds, but did not own such Shares beneficially
because it did not have discretion to vote or invest such Shares.

As of July 25, 1996, 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 a Fund were as follows: (1) Government Money Fund:
---------------------
H. Peter Dooney, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036; 5.2%; and (ii) Treasury Money Fund: French
-------------------
Holding, c/o United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036; 8.6%; and W. H. Reaves & Co., c/o United States Trust
Company of New York, 114 West 47th Street, New York, New York 10036; 5.5%.

FINANCIAL STATEMENTS
--------------------

The Companies' Annual Reports to Shareholders for the fiscal year
ended March 31, 1996 (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 Tax-Exempt Money 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, 1996 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

-32-
<PAGE>

firm as experts in accounting and auditing. Additional copies of the Annual
Reports may be obtained at no charge by telephoning CGFSC at the telephone
number appearing on the front page of this Statement of Additional Information.

-33-
<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 generally 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 interest of unsubordinated
instruments having a maturity of one

A-3
<PAGE>

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 which posses a particularly strong credit feature
are supported by the highest capacity for timely repayment.

"A1" - Obligations are supported by the highest capacity for timely
repayment.

"A2" - Obligations are supported by a satisfactory 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 absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.

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

A-6
<PAGE>

likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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.

(P) ... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.

A-7
<PAGE>

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.

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.

To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" 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 such that 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, 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

A-9
<PAGE>

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 extremely high.

"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.

"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.

"BBB" - This designation represents 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.

A-10
<PAGE>

"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.

"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

A-11
<PAGE>

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>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

New York Intermediate-Term Tax-Exempt Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1996

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 Excelsior Tax-Exempt
Funds, Inc. ("Excelsior Tax-Exempt Fund") dated August 1, 1996 (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 Excelsior
Tax-Exempt Fund c/o Chase Global Funds Services Company, 73 Tremont Street,
Boston, MA 02108-3913 or by calling (800) 446-1012.
<PAGE>

TABLE OF CONTENTS
-----------------

Page
----

INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . 1

Additional Information on Portfolio
Instruments . . . . . . . . . . . . . . . . . . . 1
Risk Factors Relating to
New York Municipal Obligations . . . . . . . . . . 7
Additional Investment Limitations. . . . . . . . . . 22

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION. . . . . . 23

INVESTOR PROGRAMS . . . . . . . . . . . . . . . . . . . . 26

Systematic Withdrawal Plan . . . . . . . . . . . . . 26
Exchange Privilege . . . . . . . . . . . . . . . . . 26
Other Investor Programs. . . . . . . . . . . . . . . 27

DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . 27

MANAGEMENT OF THE FUND. . . . . . . . . . . . . . . . . . 29

Directors and Officers . . . . . . . . . . . . . . . 29
Investment Advisory and Administration
Agreements . . . . . . . . . . . . . . . . . . . . 33
Service Organizations. . . . . . . . . . . . . . . . 35
Expenses. . . . . . . . . . . . . . . . . . . . . . 36
Custodian and Transfer Agent. . . . . . . . . . . . 37

PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . 38

INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . . . . 40

COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . 40

ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . 40

Federal. . . . . . . . . . . . . . . . . . . . . . . 40
Taxation of Certain Financial Instruments. . . . . . 43

PERFORMANCE AND YIELD INFORMATION . . . . . . . . . . . . 45

MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 48

FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . 49

APPENDIX A . . . . . . . . . . . . . . . . . .. . . . . . A-1

-i-
<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 Obligations 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 rate with different ratings may have the same yield.
Subsequent

-1-
<PAGE>

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 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.

-2-
<PAGE>

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 than 25% of its net assets in Municipal Obligations covered by
insurance policies.

-3-
<PAGE>

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 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.

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

-5-
<PAGE>

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 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.

-6-
<PAGE>

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 investments 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.

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.

-7-
<PAGE>

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.

There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.

State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
State per capita income for 1994 was estimated at $25,999, which was 19.2% above
the 1994 estimated national average of $21,809. Between 1975 and 1990 total
employment grew by 21.3 percent while the labor force grew only by 15.7 percent,
unemployment fell from 9.5 percent to 5.2 percent of the labor force. In 1991
and 1992, however, total employment in the State fell by 5.5 percent. As a
result, the unemployment rate rose to 8.5 percent reflecting a recession that
has had a particularly strong impact on the entire Northeast. Calendar years
1993 and 1994 saw only a partial recovery.

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 current fiscal year commenced on April 1, 1996, and ends on
March 31, 1997. The State's budget for the 1996-97 fiscal year was enacted by
the Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and is based on the State's budget as enacted by the
Legislature and signed into law by the Governor, as well as actual results for
the first quarter of the current fiscal year.

-8-
<PAGE>

After adjustments for comparability between fiscal years, the adopted
1996-97 budget projects a year-over-year increase in General Fund disbursements
of 0.2 percent. The 1996-97 State Financial Plan is projected to be balanced on
a cash basis. As compared to the Governor's proposed budget as revised on March
20, 1996, the State's adopted budget for 1996-97 increases General Fund spending
by $842 million. Resources used to fund these additional expenditures include
$540 million in increased revenues projected for 1996-97 based on
higher-than-projected tax collections during the first half of calendar 1996,
$110 million in projected receipts from a new State tax amnesty program, and
other resources including certain non-recurring certain resources.

The 1996-97 State Financial Plan includes actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The
Division of the Budget estimates that the 1996-97 State Financial Plan contains
actions that provide non-recurring resources or savings totaling approximately
$1.3 billion or 3.9 percent of total General Fund receipts.

-9-
<PAGE>

The State Division of the Budget has noted that the economic and
financial condition of the State may be affected by various financial, social,
economic and political factors. Those factors can be very complex, can vary
from fiscal year to fiscal year, and are frequently the result of actions taken
not only by the State but also by entities, such as the federal government, that
are outside the State's control. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be no
assurance that the State economy will not experience results that are worse than
predicted, with corresponding material and adverse effects on the State's
financial projections.

In the past, the State has taken management actions and made use of
internal sources to address cash flow needs and State financial plan shortfalls,
and the Division of Budget believes it could take similar action should
variances from its projections occur in the current fiscal year. Those
variances could, however, affect the State's ability to achieve a balanced
budget on a cash basis for the fiscal year.

Uncertainties with regard to both the economy and potential decisions
at the federal level add further pressure on future budget balance in New York
State. For example, various proposals relating to federal tax and spending
policies could, if enacted, have a significant impact on the State's financial
condition in the current and future fiscal years. The budget and tax proposals
under consideration at the federal level could also have a disproportionately
negative impact on the longer-term outlook for the State's economy as compared
to other states. A significant risk to the State's projections arises from tax
legislation under consideration by Congress and the President. Congressionally
adopted retroactive changes to federal tax treatment of capital gains would flow
through automatically to
-10-
<PAGE>

the State personal income tax. Such changes, if ultimately enacted, could
produce revenue losses in the 1996-1997 fiscal year. In addition, changes in
federal aid programs, currently pending in Congress, could result in prolonged
interruptions in the receipt of federal grants.

The projections and assumptions contained in the 1996-97 State
Financial Plan are subject to revision which may involve substantial change, and
no assurance can be given that these estimates and projections will be realized.

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 State reported a General Fund operating surplus of $380 million for
the 1995-96 fiscal year, as compared to an operating deficit of $1.43 billion
for the prior fiscal year. The 1995-96 fiscal year surplus reflects several
factors, including the cash-basis surplus and the benefit of $529 million on
Local Government Assistance Corporation ("LGAC") bonds, which were used to fund
various local assistance programs. This was offset in part by a $437 million
increase in tax refund liability primarily resulting from the effects of ongoing
tax reductions and to a lesser extent changes in accrual measurement policies,
and increases in various other expenditure accruals.

The General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds are
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Fund disbursements and transfers to other funds are
projected to be $33.12 billion, an increase of $444 million from the total in
the prior fiscal year.

The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1996 showed

-11-
<PAGE>

an accumulated deficit in its combined governmental funds of $1.23 billion,
reflecting liabilities of $14.59 billion and assets of $13.35 billion.

DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
----
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.

The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.

The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the 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

-12-
<PAGE>

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 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.

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 could be presented to the
voters for their consideration, it had to be passed by a separately elected
legislature. The amendment was passed by the Senate and Assembly in June 1995.
The Amendment was thereafter submitted to voters in November 1995, where it was
defeated.

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

-13-
<PAGE>

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 anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1996-97. The State expected
to issue $411 million in general obligation bonds (including $153.6 million for
purposes of redeeming outstanding bond anticipation notes) and $154 million in
general obligation commercial paper. The Legislature had also authorized the
issuance of up to $101 million in certificates of participation during the
State's 1996-97 fiscal year for equipment purchases. The projection of the
State regarding its borrowings for the 1996-97 fiscal year may change if
circumstances require.

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 were 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 were 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 were 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

-14-
<PAGE>

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; (7)
challenges to certain aspects of petroleum business taxes; (8) action alleging
damages resulting from the failure by the State's Department of Environmental
Conservation to timely provide certain data; (9) a challenge to the
constitutionality of a State lottery game; and (10) an action seeking
reimbursement from the State for certain costs arising out of the provision of
pre-school services and programs for children with handicapped conditions.

Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $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 under the prior
funding method. As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York, on January 21, 1994, the State
----------------- -----------------
entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's 1994-
95 fiscal year. Litigation challenging the constitutionality of the treatment
of certain moneys held in a reserve fund was settled in June 1996 and certain
amounts in a Supplemental Reserve Fund previously credited by the State against
prior State and local pension contributions will be paid in 1998.

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 1996-97 State
Financial Plan. An adverse decision in any of these proceedings could exceed
the amount of the 1996-97

-15-
<PAGE>

State Financial Plan reserve for the payment of judgments and, therefore, could
affect the ability of the State to maintain a balanced 1996-97 State Financial
Plan. In its audited financial statements for the fiscal year ended March 31,
1996, the State reported its estimated liability for awarded and anticipated
unfavorable judgments to be $474 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, 1995, date of the latest data
available, there were 17 Authorities that had outstanding debt of $100 million
or more. The aggregate outstanding debt, including refunding bonds, of all
Authorities was $73.45 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 17 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

-16-
<PAGE>

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 the 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, 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. Moody's currently has the City's rating under
review for a possible downgrade.

New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from

-17-
<PAGE>

sales of MAC bonds and notes. MAC is authorized to issue bonds and notes payable
from certain stock transfer tax revenues, from the City's portion of the State
sales tax derived in the City and, subject to certain prior claims, from State
per capita aid otherwise payable by the State to the City. Failure by the State
to continue the imposition of such taxes, the reduction of the rate of such
taxes to rates less than those in effect on July 2, 1975, failure by the State
to pay such aid revenues and the reduction of such aid revenues below a
specified level are included among the events of default in the resolutions
authorizing MAC's long-term debt. The occurrence of an event of default may
result in the acceleration of the maturity of all or a portion of MAC's debt.
MAC bonds and notes constitute general obligations of MAC and do not constitute
an enforceable obligation or debt of either the State or the City. As of
December 31, 1995, MAC had outstanding an aggregate of approximately $4.684
billion of its bonds. MAC is authorized to issue bonds and notes to refunds its
outstanding bonds and notes and to fund certain reserves, without limitation as
to principal amount, and to finance certain capital commitments to the Transit
Authority and the New York City School Construction Authority for the 1992
through 1997 fiscal years in the event the City fails to provide such financing.

The City and MAC have reached an agreement in principle under which
MAC will develop and implement a debt restructuring program which will provide
the City with $125 million in budget relief in fiscal year 1996, in addition to
the $20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in each of the four fiscal years starting in fiscal
year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions.

Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.

-18-
<PAGE>

From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.

On January 31, 1996, the City published the financial plan for the
1996-1999 fiscal years (the "City Financial Plan"), which is a modification to a
financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the Financial
Plan reflected a strategy to substantially reduce spending for entitlements for
the 1996 and subsequent fiscal years, and to decrease the City's costs for
Medicaid in the 1997 fiscal year and thereafter by increasing the federal share
of Medicaid costs otherwise paid by the City. This strategy has been the
subject of substantial debate, and implementation of this strategy will be
significantly affected by State and federal budget proposals currently being
considered. It is likely that the City Financial Plan will be changed
significantly in connection with the preparation of the Executive Budget for the
1997 fiscal year as a result of the status of State and federal budget proposals
and other factors.

The City Financial Plan also set forth projections for the 1997
through 1999 fiscal years and outlined a proposed gap-closing program to
eliminate a projected gap of $2.0 billion for the 1997 fiscal year, and to
reduce projected gaps of $3.3 billion and $4.1 billion for the 1998 and 1999
fiscal years, respectively, assuming successful implementation of the gap-
closing program for the 1996 fiscal year.

The proposed gap-closing actions for the 1997 through 1999 fiscal
years included: (i) additional agency actions, totaling between $643 million and
$691 million in each of the 1997 through 1999 fiscal years; (ii) additional
savings resulting from State and federal aid and cost containment in entitlement
programs to reduce City expenditures and increase revenues by $650 million in
the 1997 fiscal year and by $727 million in each of the 1998 and 1999 fiscal
years; (iii) additional proposed

-19-
<PAGE>

federal aid of $50 million in the 1997 fiscal year and State aid of $100 million
in each of the 1997 through 1999 fiscal years; (iv) the receipt of $300 million
in the 1997 fiscal year from privatization or other initiatives, certain of
which actions is expected to require legislative action by the City Council; and
(v) the assumed receipt of revenues relating to rent payments for the City's
airports, totaling $244 million, $226 million and $70 million in the 1997
through 1999 fiscal years, respectively, which are currently the subject of a
dispute with the Port Authority and the collection of which may depend on the
successful completion of negotiations with the Port Authority or the enforcement
of the City's remedies under the leases through pending legal actions. The City
was also preparing an additional contingency gap-closing program for the 1997
fiscal year to be comprised of $200 million in additional agency actions.

The federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The nature and extent of the impact on the City of the federal and
State budgets, when adopted, is uncertain, and no assurance can be given that
federal or State actions included in the federal and State adopted budgets may
not have a significant adverse impact on the City's budget and the City
Financial Plan.

The projections for the 1996 through 1999 fiscal years reflected the
costs of the proposed settlement with the teachers union and the recent
settlement with a coalition of municipal unions, and assumed that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements.

The City's financial plans have been the subject of extensive public
comment and criticism. The City comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the general
reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the City Financial Plan assumed
the implementation of highly uncertain State and federal actions, most of which
are unlikely to be implemented, that would provide between $1.2 billion and $1.4
billion in relief to the City, and identified additional risks. The report
concluded that the magnitude of the budget risk for the 1997 fiscal year, after
two years of large agency cutbacks and workforce reductions, indicated the
seriousness of the City's continuing budget difficulties, and that the City
Financial Plan would require substantial revision in order to provide a credible
program for dealing with the large projected budget gap for the 1997 fiscal
year.

-20-
<PAGE>

The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.

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 was not included in
the State's projections of its receipts and disbursements.

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.

Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.

Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.

Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1994, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
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. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1994.

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

-21-
<PAGE>

localities and require increasing New York State assistance in the future.

Additional Investment Limitations
- ---------------------------------

In addition to the investment limitations disclosed in the Prospectus,
the Fund is subject to the following investment limitations, which may be
changed only by a vote of the holders of a majority of the Fund's outstanding
Shares (as defined under "Miscellaneous" in the Prospectus).

The Fund may not:

1. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;

2. Purchase securities on margin, make short sale of securities, or
maintain a short position; provided that the Fund may enter into futures
contracts and futures options;

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.

-22-
<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 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 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, 1996, is as follows:

New York Intermediate -
Term Tax-Exempt Fund
-----------------------
<S> <C>

Net Assets.................. $96,406,782
Outstanding Shares.......... 11,418,683

Net Asset Value Per Share... $ 8.44

Sales Charge (4.50% of the
offering price)............. $ 0.40

Offering to Public.......... $ 8.84

</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

-23-
<PAGE>

(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 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 Fund; (i) purchases of Shares by officers, trustees, directors,
employees, former employees and retirees of Excelsior Tax-Exempt Fund, Excelsior
Funds, Inc. ("Excelsior Fund"), Excelsior Institutional Trust, Excelsior
Funds, 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 the Excelsior Tax-Exempt Fund or Excelsior 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 Excelsior Tax-Exempt Fund, Excelsior Fund, Excelsior
Institutional Trust or Excelsior Funds; (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 Excelsior Fund or Excelsior 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, 1996, 1995 and 1994
were $0, $0 and $2,243, respectively. Of these amounts, UST Distributors, Inc.,
the Fund's former distributor, retained $0 for the period April 1, 1995 through
July 31, 1995, $0 for the fiscal year ended March 31, 1995 and $1,750 for the
fiscal year ended March 31, 1994. Edgewood Services, Inc., the Fund's
distributor, retained none of the foregoing sales charges for

-24-
<PAGE>

the period from August 1, 1995 through March 31, 1996. The balance was paid to
selling dealers.

Excelsior 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.

Excelsior Tax-Exempt Fund reserves the right to honor any request for
redemption or repurchase of the Fund's Shares by making payment in whole or in
part in securities chosen by Excelsior Tax-Exempt Fund and valued in the same
way as they would be valued for purposes of computing the Fund's net asset
value. If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. Such redemptions in kind will
be governed by Rule 18f-1 under the 1940 Act so that the Fund is obligated to
redeem its Shares solely in cash up to the lesser of $250,000 or 1% of its net
asset value during any 90-day period for any one shareholder of the Fund.

Under limited circumstances, Excelsior 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 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.

-25-
<PAGE>

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 Chase Global Funds Services
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.

Exchange Privilege
- ------------------

Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for Shares of any other portfolio of
Excelsior Fund or Excelsior Tax-Exempt Fund (collectively, the "Companies") or
for Trust Shares of Excelsior Institutional Trust. Shares may be exchanged by
wire, telephone or mail and must be made to accounts of identical registration.
There is no exchange fee imposed by the Companies or Excelsior Institutional
Trust. In order to prevent abuse of this privilege to the disadvantage of other
shareholders, the Companies and Excelsior Institutional Trust reserve the right
to limit the number of exchange requests of Investors and Customers of
Shareholder Organizations to no more than six per year. The

-26-
<PAGE>

Companies and Excelsior Institutional Trust may modify or terminate the exchange
program at any time upon 60 days' written notice to shareholders, and may reject
any exchange request.

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
----------------------------

Excelsior 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 Excelsior 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 Prospectus describes the classes of shares into
which Excelsior Tax-Exempt Fund's authorized capital is currently classified.

Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of the Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to the Fund and a proportionate distribution, based upon the relative
asset values of Excelsior Tax-Exempt Fund's portfolios, of any general assets of
Excelsior Tax-Exempt Fund not belonging to any particular portfolio of Excelsior
Tax-Exempt Fund which are available for distribution. In the event of a
liquidation or dissolution of Excelsior Tax-

-27-
<PAGE>

Exempt Fund, its shareholders will be entitled to the same distribution process.

Shareholders of Excelsior 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 Excelsior Tax-Exempt Fund may elect all of Excelsior
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 Excelsior 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 Excelsior Tax-
Exempt Fund voting without regard to class.

Excelsior 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 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 Excelsior 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

-28-
<PAGE>

into shares of another class of Excelsior 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 Excelsior 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 Excelsior
Tax-Exempt Fund's Charter, Excelsior 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 Excelsior Tax-Exempt Fund voting without regard to
class.

MANAGEMENT OF THE FUND
----------------------

Directors and Officers
- ----------------------

The directors and executive officers of Excelsior 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
Excelsior Tax- During Past 5 Years and
Name and Address Exempt Fund Other Affiliations
- ----------------------------------- -------------- -------------------------------
<S> <C> <C>

Alfred C. Tannachion/1/ Chairman of Retired; Chairman of the
1135 Hyde Park Court the Board, Boards, President and Treasurer
Mahwah, NJ 07430 President and of Excelsior Fund and Excelsior
Age: 70 Treasurer Tax-Exempt; Chairman of the
Board, President and Treasurer
of UST Master Variable Series,
Inc. (since 1994); Chairman of
the Board, President and
Treasurer of Excelsior
Institutional Trust (since
1995).

Donald L. Campbell Director Retired; Director of Excelsior Fund
333 East 69th Street and Excelsior Tax-Exempt;
Apt. 10-H Director of UST Master Variable
New York, NY 10021 Series, Inc. (since 1994);

</TABLE>
- ------------------------
/1/ This director is considered to be an "interested person" of Excelsior Fund
as defined in the 1940 Act.

-29-
<PAGE>

Age: 70 Trustee of Excelsior
Institutional Trust (since
1995); Director, Royal
Life Insurance Co. of NY (since
1991).

Joseph H. Dugan Director Retired; Director of
913 Franklin Lakes Road Excelsior Fund and Excelsior
Franklin Lakes, NJ 07417 Tax-Exempt; Director of UST
Age: 71 Master Variable Series,
Inc. (since 1994); Trustee
of Excelsior Institutional
Trust (since 1995).

Wolfe J. Frankl Director Retired; Director of
2320 Cumberland Road Excelsior Fund and Excelsior
Charlottesville, VA 22901 Tax-Exempt; Director of UST
Age: 75 Master Variable Series,
Inc. (since 1994); Trustee
of Excelsior Institutional
Trust (since 1995);
Director, Deutsche Bank
Financial, Inc. (since
1989); Director, The Harbus
Corporation (since 1951);
Trustee, HSBC Funds Trust
and HSBC Mutual Funds Trust
(since 1995).

Robert A. Robinson Director Director of Excelsior Fund and
Church Pension Fund Excelsior Tax-Exempt;
800 Second Avenue Director of UST Master
New York, NY 10017 Variable Series, Inc.
Age: 70 (since 1994); Trustee of
Excelsior Institutional
Trust (since 1995);
President Emeritus, The
Church Pension Fund and its
affiliated companies (since
1968); Trustee, H.B. and
F.H. Bugher Foundation and
Director of its wholly
owned subsidiaries --
Rosiclear Lead and
Flourspar Mining Co. and
The Pigmy Corporation
(since 1984); Director,
Morehouse Publishing Co.

</TABLE>

-30-
<PAGE>

(since 1974); Trustee, HSBC
Funds Trust and HSBC Mutual
Funds Trust (since 1982);
Director, Infinity Funds,
Inc. (since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of
1345 Chestnut Street Drinker Biddle & Reath.
Philadelphia, PA 19107-3496
Age: 53

Sherry Aramini Assistant Second Vice President, Blue
Chase Global Funds Secretary Sky Compliance Manager,
Services Company Chase Global Funds Services
73 Tremont Street Company since May 1996;
Boston, MA 02108-3913 Technical Resource Manager,
Age: 32 Chase Global Funds Services
Company, April 1995-May
1996; Financial Reporting
Supervisor, Chase Global
Funds Services Company,
September 1993-April 1995;
Audit Supervisor, Coopers &
Lybrand L.L.P., July 1990-
August 1993.

</TABLE>
- ------------------------
/1/ This director is considered to be an "interested person" of Excelsior Fund
as defined in the 1940 Act.

-31-
<PAGE>

John M. Corcoran Assistant Vice President, Director of
Chase Global Funds Treasurer Administration, Client Group,
Services Company Chase Global Funds Services
73 Tremont Street Company (July 1996-present);
Boston, MA 02108-3913 Second Vice President, Manager
Age 31 of Administration, Chase Global
Funds Services Company (October
1993-July 1996); Audit Manager,
Ernst & Young LLP (from August
1987 to September 1993).
</TABLE>

Each director of Excelsior Tax-Exempt Fund receives an annual fee of
$9,000 with respect to each Company 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
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
Excelsior Tax-Exempt Fund. The employees of Chase Global Funds Services Company
do not receive any compensation from Excelsior Tax-Exempt Fund for acting as
officers of Excelsior 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 Excelsior Tax-Exempt Fund. As of July 15, 1996, the directors and
officers of Excelsior Tax-Exempt Fund as a group owned beneficially less than 1%
of the outstanding Shares of all Funds of the Company in the aggregate.

The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.

-32-
<PAGE>

Pension or
Retirement Total
Benefits Compensation from
Aggregate Accrued as Excelsior Tax-Exempt
Compensation from Part of Fund and Fund
Name of Excelsior Fund Complex/*/ Paid
Person/Position Tax-Exempt Fund Expenses to Directors
- ------------------------------ ----------------- ---------- --------------------
<S> <C> <C> <C>

Donald L. Campbell $16,500 None $39,500(4)**
Director

Joseph H. Dugan $16,500 None $39,500(4)**
Director

Wolfe J. Frankl $16,500 None $39,500(4)**
Director

Robert A. Robinson
Director $16,500 None $39,000(4)**

Alfred C. Tannachion $21,500 None $51,500(4)**
Chairman of the Board,
President and Treasurer

Frederick S. Wonham/+/
Director $ 6,375 None $14,424(4)**
- ---------------------------
</TABLE>
/*/ The "Fund Complex" consists of Excelsior, Excelsior Tax-Exempt, UST Master
Variable Series, Inc, Excelsior Funds and Excelsior Institutional Trust.

/**/ Number of investment companies in the Fund Complex for which director
serves as director or trustee.

/+/ Frederick S. Wonham was elected to the Board of Directors of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. on November 17, 1995.

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, 1994, 1995 and 1996, Excelsior Tax-Exempt Fund paid the Investment Adviser
$505,148, $449,781 and $450,208, respectively, with respect to the Fund. For the
fiscal years ended March 31, 1996, 1995 and 1994, the Investment Adviser waived
fees totalling $22,385, $17,901 and $1,351 with respect to the Fund.

-33-
<PAGE>

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.

Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services, an affiliate of the Distributor, and U.S. Trust serve
as the Fund's administrators (the "Administrators"). 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.

Prior to August 1, 1995, administrative services were provided by
CGFSC and Concord Holding Corporation (collectively, the "former
administrators") under an administration agreement having substantially the same
terms as the Administration Agreements currently in effect. For the fiscal years
ended March 31, 1994 and 1995, Excelsior Tax-Exempt Fund paid the former
administrators $156,257 and $144,024, respectively in the aggregate with respect
to the Fund. For the period from April 1, 1995 through July 31, 1995, Excelsior
Tax-Exempt Fund paid the former administrators $46,815 in the aggregate with
respect to the Fund, and for the period August 1, 1995 through March 31, 1996,
Excelsior Tax-Exempt Fund paid the Administrators $98,971 in the aggregate for
the Fund. For the period April 1, 1995 through July 31, 1995, the former
administrators waived fees totalling $160 in the aggregate with respect to the
Fund, and for the period August 1, 1995 through March 31, 1996, the
Administrators waived fees totalling $41 in the aggregate with respect to the
Fund.

-34-
<PAGE>

Service Organizations
- ---------------------

As stated in the Prospectus, Excelsior 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 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 Excelsior 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
Excelsior 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 Excelsior Tax-Exempt Fund to
Customers; (j) receiving, tabulating and transmitting to Excelsior Tax-Exempt
Fund proxies executed by Customers with respect to annual and special meetings
of shareholders of Excelsior Tax-Exempt Fund; (k) providing reports (at least
monthly, but more frequently if so requested by Excelsior 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 Excelsior Tax-Exempt Fund or a
Customer may reasonably request.

Excelsior Tax-Exempt Fund's agreements with Service Organizations are
governed by an Administrative Services Plan (the "Plan") adopted by Excelsior
Tax-Exempt Fund. Pursuant to the Plan, Excelsior Tax-Exempt Fund's Board of
Directors will review, at least quarterly, a written report of the amounts
expended under Excelsior Tax-Exempt Fund's agreements with Service Organizations
and the purposes for which the expenditures were made. In addition, the
arrangements with Service

-35-
<PAGE>

Organizations will be approved annually by a majority of Excelsior Tax-Exempt
Fund's directors, including a majority of the directors who are not "interested
persons" of Excelsior Tax-Exempt Fund as defined in the 1940 Act and have no
direct or indirect financial interest in such arrangements (the "Disinterested
Directors").

Any material amendment to Excelsior 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
Excelsior Tax-Exempt Fund's arrangements with Service Organizations are in
effect, the selection and nomination of the members of Excelsior Tax-Exempt
Fund's Board of Directors who are not "interested persons" (as defined in the
1940 Act) of Excelsior Tax-Exempt Fund will be committed to the discretion of
such non-interested Directors.

For the fiscal years ended March 31, 1996, 1995 and 1994, payments to
Service Organizations totalled $22,586, $17,923 and $1,351, respectively, with
respect to the New York Intermediate-Term Tax-Exempt Fund, of which $22,586,
$17,458 and $1,351, respectively, 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 Excelsior 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

-36-
<PAGE>

payable to them. The amounts of the above reimbursements, if any, will be
estimated, reconciled and paid on a monthly basis. To Excelsior 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 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
- ----------------------------

The Chase Manhattan Bank, N.A. ("Chase") serves as custodian of the
Fund's assets. Under the custodian agreement, Chase 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 Excelsior Tax-Exempt Fund's Board of Directors
concerning the Fund's operations. Chase may, at its own expense, open and
maintain custody accounts with respect to the Fund, with the banks or trust
companies, provided that Chase shall remain liable for the performance of all
its custodial duties under the Custodian Agreement, notwithstanding any
delegation.

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 Excelsior 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,

-37-
<PAGE>

handling of proxies, and other similar expenses in connection with the above
services.

U.S. Trust may, at its own expense, delegate its transfer agency
obligations to another transfer agent registered or qualified under applicable
law, provided that U.S. Trust shall remain liable for the performance of all of
its transfer agency duties under the Transfer Agency Agreement, notwithstanding
any delegation. Pursuant to this provision in the agreement, U.S. Trust has
entered into a sub-transfer agency arrangement with CGFSC, an affiliate of
Chase, with respect to accounts of shareholders who are not Customers of U.S.
Trust. For the services provided by CGFSC, U.S. Trust has agreed to pay CGFSC
$15.00 per annum per account or subaccount plus out-of-pocket expenses. CGFSC
receives no fee directly from Excelsior Tax-Exempt Fund for any of its sub-
transfer agency services.

PORTFOLIO TRANSACTIONS
----------------------

Subject to the general control of Excelsior 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.

-38-
<PAGE>

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 Excelsior Tax-Exempt Fund, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.

In addition, the Investment Advisory Agreement authorizes the
Investment Adviser, to the extent permitted by law and subject to the review of
Excelsior 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

-39-
<PAGE>

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 other investment companies
or common trust funds in order to obtain best execution.

The Company is required to identify any securities of its regular brokers
or dealers (as defined in Rule 10b-1 under the 1940 Act) or its parents held by
the Company as of the close of its most recent fiscal year. As of March 31,
1996, the Fund held no securities of Excelsior Tax-Exempt Fund's regular brokers
or dealers or their parents.

INDEPENDENT AUDITORS
--------------------

Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Excelsior Tax-Exempt Fund. The Fund's Financial
Highlights included in the Prospectus and the financial statements for the
period ended March 31, 1996 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 Excelsior
Tax-Exempt Fund, is a partner), Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107-3496, is counsel to Excelsior
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

-40-
<PAGE>

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 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

-41-
<PAGE>

will be the same for all shareholders receiving dividends from the Fund for such
year.

Interest on indebtedness incurred by a shareholder to purchase or
carry the Shares generally 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 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."

-42-
<PAGE>

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 "mark-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 constructive sale of the contracts. Futures
contracts to sell 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 futures 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.

-43-
<PAGE>

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 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 mark-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 mark-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 mark-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.

* * *

-44-
<PAGE>

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.

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.

-45-
<PAGE>

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, 1996
was 3.73%.

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, 1996 was 5.41%.

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 /1/n/
T = [(-----) - 1]
P

Where: T = average annual total return.

ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year (or other)
periods at the end of the applicable period (or a
fractional portion thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed in years.

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)

-46-
<PAGE>

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 from
commencement of operations (May 31, 1990) to March 31, 1996 and for the one year
period ended March 31, 1996 and the five year period ended March 31, 1996 were
5.81%, 1.94% and 5.26%, 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

-47-
<PAGE>

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 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 Excelsior Tax-Exempt Fund not belonging to a particular portfolio of
Excelsior 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

-48-
<PAGE>

the direct liabilities of the Fund allocable to Shares and with a share of the
general liabilities of Excelsior Tax-Exempt Fund which are normally allocated in
proportion to the relative asset values of Excelsior Tax-Exempt Fund's
portfolios at the time of allocation. Subject to the provisions of Excelsior
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.

As of July 15, 1996, 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
--------------------

Excelsior Tax-Exempt Fund's Annual Report to Shareholders for the
fiscal year ended March 31, 1996 (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, 1996 have been audited by
Excelsior Tax-Exempt Fund's independent auditors, Ernst & Young LLP, whose
report thereon also appears in such Annual 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 CGFSC at the telephone
number appearing on the front page of this Statement of Additional Information.

-49-
<PAGE>