<PAGE>
[LOGO]EXCELSIOR
A Management Investment Company
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California Tax-Exempt Income Fund For initial purchase information, current
prices, yield and performance information
and existing account information, call (800)
446-1012. (From overseas, call (617) 557-
8280.)
73 Tremont Street Boston, Massachusetts 02108-3913
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This Prospectus describes the California Tax-Exempt Income Fund (the "Fund"), a
non-diversified investment portfolio offered to investors by Excelsior Tax-Ex-
empt Funds, Inc. ("Excelsior Tax-Exempt Fund") (formerly UST Master Tax-Exempt
Funds, Inc.), an open-end management investment company.
CALIFORNIA TAX-EXEMPT INCOME FUND'S investment objective is to provide Cali-
fornia investors with as high a level of current interest income exempt from
Federal income tax and, to the extent possible, from California state personal
income tax as is consistent with relative stability of principal. Under normal
market conditions, at least 65% of the Fund's total assets will be invested in
California Municipal Obligations (as defined below). Although the Fund has no
restrictions as to the minimum or maximum maturity of any individual security
it may hold, it will generally have a dollar-weighted average portfolio matu-
rity of 3 to 10 years.
Edgewood Services, Inc. sponsors the Fund and serves as its distributor.
United States Trust Company of New York (the "Investment Adviser" or "U.S.
Trust") serves as the Fund's investment adviser and United States Trust Company
of California (the "Sub-Adviser") serves as the Fund's sub-adviser.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated October 1, 1996 and containing additional information about
the Fund has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Excelsior Tax-Exempt Fund at its address shown above or by
calling (800) 446-1012. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in its entirety
into this Prospectus.
SHARES IN THE FUND ("SHARES") ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, UNITED STATES TRUST COMPANY, ITS PARENT AND AFFILIATES AND THE
SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE
SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
October 1, 1996
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EXPENSE SUMMARY
<TABLE>
<CAPTION>
CALIFORNIA
TAX-EXEMPT
INCOME FUND
-----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load on Purchases (as percentage of offering price)... 4.50%
Sales Load on Reinvested Dividends.................................. None
Deferred Sales Load................................................. None
Redemption Fees/1/.................................................. None
Exchange Fee........................................................ None
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Advisory Fees (after fee waivers)/2/................................ .38%
12b-1 Fees.......................................................... None
Other Operating Expenses............................................ .32
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Administrative Servicing Fee/2/.................................... .02
Other Expenses..................................................... .30
----
Total Operating Expenses (after fee waivers)/2/..................... .70%
======
</TABLE>
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1. The Fund's transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors which is not reflected
in the estimated expense ratios presented herein. Shareholder organizations
may charge their customers transaction fees in connection with redemptions.
See "Redemption Procedures."
2. The Investment Adviser and Administrators may from time to time voluntarily
waive part of their respective fees, which waivers may be terminated at any
time. Until further notice, the Investment Adviser and/or Administrators in-
tend to voluntarily waive fees in an amount equal to the Administrative Ser-
vicing Fee. Without such fee waivers, "Advisory Fee" would be .50% and "To-
tal Operating Expenses" would be .82% for the Fund.
Example: You would pay the following estimated expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption of your investment at the end
of the following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
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<S> <C> <C>
California Tax-Exempt Income Fund................................ $52 $66
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares) are intended to assist the investor in understanding the
costs and expenses that an investor in Shares of the Fund will bear directly or
indirectly. The expense summary sets forth estimated advisory and other ex-
penses payable with respect to Shares of the Fund for the current fiscal year.
For more complete descriptions of the Fund's operating expenses, see "Manage-
ment of the Fund" in this Prospectus.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
2
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INVESTMENT OBJECTIVE AND POLICIES
The Investment Adviser and the Sub-Adviser will use their best efforts to
achieve the Fund's investment objective although its achievement cannot be as-
sured. The Fund's investment objective and, except as indicated otherwise, the
policies described below may be changed by Excelsior Tax-Exempt Fund's Board of
Directors without a vote of the Fund's shareholders. Certain investment limita-
tions which cannot be changed without the requisite vote of the shareholders
are set forth below under "Investment Limitations."
GENERAL
The Fund is a non-diversified investment portfolio whose investment objective
is to provide California investors with as high a level of current interest in-
come exempt from Federal income tax and, to the extent possible, from Califor-
nia state personal income tax as is consistent with the preservation of capital
and relative stability of principal. To accomplish this goal, the Fund antici-
pates that it will invest primarily in California Municipal Obligations as de-
fined below. Although the Fund has no restrictions as to the minimum or maximum
maturity of any individual security that it may hold, under normal market con-
ditions it will have a dollar-weighted average portfolio maturity of 3 to 10
years.
As a matter of fundamental policy, except during temporary defensive periods,
at least 80% of the Fund's net assets will be invested in debt obligations is-
sued by or on behalf of the State of California and other states, territories
and possessions of the United States, the District of Columbia and their re-
spective authorities, agencies, instrumentalities and political sub-divisions,
the interest from which is, in the opinion of bond counsel to the issuer, ex-
empt from Federal income tax ("Municipal Obligations"). The Fund expects that,
except during temporary defensive periods, under normal market conditions 65%
of the Fund's total assets will be invested in debt securities of the State of
California, its political sub-divisions, authorities, agencies, instrumentali-
ties and corporations, and certain other governmental issuers, the interest
from which is, in the opinion of bond counsel to the issuer, exempt from Fed-
eral and California personal income taxes ("California Municipal Obligations").
In general, the Fund anticipates that dividends derived from interest on Munic-
ipal Obligations other than California Municipal Obligations will be exempt
from regular Federal income tax but may be subject to California personal in-
come taxes. Dividends paid by the Fund may be subject to local taxes regardless
of their source. See "Taxes" below.
Under normal market conditions, up to 20% of the Fund's assets may be held in
cash or invested in taxable obligations described below under "Portfolio In-
struments and Other Investment Information--Eligible Taxable Obligations." When
market conditions are uncertain, the Fund may hold cash reserves and eligible
taxable securities without limitation in order to maintain a temporary defen-
sive position. Uninvested cash reserves will not earn income.
QUALITY OF INVESTMENTS
The Fund invests in Municipal Obligations that are rated at the time of pur-
chase: (1) "A" or higher by Standard & Poor's Ratings Group ("S&P") or by
Moody's Investors Service, Inc. ("Moody's"), in the case of bonds (or, in cer-
tain instances, municipal bonds with lower ratings if they are determined by
the Investment Adviser or Sub-Adviser to be comparable to A-rated issues); (2)
"SP-2" or higher by S&P or "MIG-2" or higher ("VMIG-2" or higher, in the case
of variable rate notes) by Moody's, in the case of notes; and (3) "A-2" or
higher by S&P or "Prime-2" or higher by Moody's, in the case of tax-exempt com-
mercial paper. If not rated, Municipal Obligations purchased by the Fund will
be of comparable quality to the above ratings as determined by the Investment
Adviser or Sub-Adviser under the supervision of the Board of Directors. A dis-
cussion of Moody's and S&P's rating categories is contained in Appendix A to
the Statement of Additional Information.
3
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TYPES OF MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations which may be held
by the Fund are "general obligation" securities and "revenue" securities. Gen-
eral obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. Rev-
enue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a spe-
cial excise tax or other specific revenue source such as the user of the fa-
cility being financed. Revenue securities may include private activity bonds.
Such bonds may be issued by or on behalf of public authorities to finance var-
ious privately operated facilities, and are not payable from the unrestricted
revenues of the issuer. As a result, the credit quality of private activity
bonds is frequently related directly to the credit standing of private corpo-
rations or other entities. Since interest on private activity bonds is treated
as a specific tax preference item under the Federal alternative minimum tax,
the Fund's investments in private activity bonds will not exceed, under normal
market conditions, 20% of its total assets when added together with cash and
any taxable investments held by the Fund.
The Fund's portfolio may also include, without limitation, "moral obligation"
securities, which are normally issued by special-purpose public authorities.
If the issuer of moral obligation securities is unable to meet its debt serv-
ice obligations from current revenues, it may draw on a reserve fund, the res-
toration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
The Fund may also purchase custodial receipts evidencing the right to receive
either the principal amount or the periodic interest payments or both with re-
spect to specific underlying Municipal Obligations. In general, such
"stripped" Municipal Obligations are offered at a substantial discount in re-
lation to the principal and/or interest payments which the holders of the re-
ceipt will receive. To the extent that such discount does not produce a yield
to maturity for the investor that exceeds the original tax-exempt yield on the
underlying Municipal Obligation, such yield will be exempt from Federal income
tax for such investor to the same extent as interest on the underlying Munici-
pal Obligation. The Fund intends to purchase "stripped" Municipal Obligations
only when the yield thereon will be, as described above, exempt from Federal
income tax to the same extent as interest on the underlying Municipal Obliga-
tions. "Stripped" Municipal Obligations are considered illiquid securities
subject to the 10% limit on such investments described below.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
VARIABLE AND FLOATING RATE INSTRUMENTS
Municipal Obligations purchased by the Fund may include variable and floating
rate instruments. The interest rates on such instruments are not fixed and
vary with changes in the particular interest rate benchmarks or indexes.
Unrated variable and floating rate instruments will be purchased by the Fund
based upon the Investment Adviser's or Sub-Adviser's determination that their
quality at the time of purchase is comparable to at least the minimum ratings
set forth above. In some cases the Fund may require that the issuer's obliga-
tion to pay the principal be backed by an unconditional and irrevocable bank
letter or line of credit, guarantee or commitment to lend. Although there may
be no active secondary market with respect to a particular variable or float-
ing rate instrument purchased by the Fund, the Fund may (at any time or during
specified intervals within a prescribed period, depending upon the instrument
involved) demand payment in full of the principal and may resell the instru-
ment to a third party. The absence of an active secondary market, however,
could make it difficult for the Fund to dispose of a variable or floating rate
instrument in the event the issuer defaulted on its payment obligation or dur-
ing periods when the Fund is not entitled to exercise its demand rights. In
such cases, the Fund could suffer a loss with respect to the instruments.
4
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WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
The Fund may purchase Municipal Obligations on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transac-
tions involve a commitment by the Fund to purchase or sell particular Munici-
pal Obligations with payment and delivery taking place in the future, beyond
the normal settlement date, at a stated price and yield. Securities purchased
on a "forward commitment" or "when-issued" basis are recorded as an asset and
are subject to changes in value based upon changes in the general level of in-
terest rates. The Fund expects that its forward commitments and "when-issued"
purchases will not exceed 25% of the value of its total assets absent unusual
market conditions, and that the length of such commitments will not exceed 45
days. The Fund does not intend to engage in "when-issued" purchases and for-
ward commitments for speculative purposes but only in furtherance of its in-
vestment objective.
The Fund may also acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a "stand-by commitment," a dealer
agrees to purchase at the Fund's option specified Municipal Obligations at a
stated price. The Fund will acquire "stand-by commitments" solely to facili-
tate portfolio liquidity and does not intend to exercise its rights thereunder
for trading purposes. "Stand-by commitments" acquired by the Fund will be val-
ued at zero in determining the Fund's net asset value.
ELIGIBLE TAXABLE OBLIGATIONS
Taxable securities that may be held by the Fund within the limits described
above include: (i) municipal bond index and interest rate futures contracts;
(ii) obligations of the U.S. Treasury; (iii) obligations of agencies and in-
strumentalities of the U.S. Government; (iv) money market instruments such as
certificates of deposit and bankers' acceptances; (v) repurchase agreements
collateralized by U.S. Government obligations or other money market instru-
ments; or (vi) securities issued by other investment companies. Municipal bond
index and interest rate futures contracts, investment company securities and
repurchase agreements are described below.
Futures Contracts
The Fund may purchase and sell municipal bond index and interest rate futures
contracts as a hedge against changes in market conditions. A municipal bond
index assigns values daily to the municipal bonds included in the index based
on the independent assessment of dealer-to-dealer municipal bond brokers. A
municipal bond index futures contract represents a firm commitment by which
two parties agree to take or make delivery of an amount equal to a specified
dollar amount multiplied by the difference between the municipal bond index
value on the last trading date of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
securities in the index is made.
The Fund may enter into contracts for the future delivery of fixed-income se-
curities commonly known as interest rate futures contracts. Interest rate
futures contracts are similar to the municipal bond index futures contracts
except that, instead of a municipal bond index, the "underlying commodity" is
represented by various types of fixed-income securities.
The Fund will not engage in transactions in futures contracts for specula-
tion, but only as a hedge against changes in market values of securities which
the Fund holds or intends to purchase to attempt to reduce risks inherent in
the management of the Fund. The Fund will engage in futures contracts only to
the extent permitted by the Commodity Futures Trading Commission ("CFTC") and
the Securities and Exchange Commission ("SEC"). When investing in futures con-
tracts, the Funds must satisfy certain asset segregation requirements to en-
sure that the use of futures is unleveraged. When a Fund takes a long position
in a futures contract, it must maintain a segregated account containing liquid
assets equal to the purchase price of the contract, less any margin or depos-
it. When a Fund
5
<PAGE>
takes a short position in a futures contract, the Fund must maintain a segre-
gated account containing liquid assets in an amount equal to the market value
of the securities underlying such contract (less any margin or deposit), which
amount must be at least equal to the market price at which the short position
was established. Asset segregation requirements are not applicable when the
Fund "covers" a futures position generally by entering into an offsetting po-
sition. As of the date of this Prospectus, the Fund intends to limit its hedg-
ing transactions in futures contracts so that, immediately after any such
transaction, the aggregate initial margin that is required to be posted by the
Fund under the rules of the exchange on which the futures contract is traded
does not exceed 5% of the Fund's total assets, after taking into account any
unrealized profits and losses on the Fund's open contracts.
Transactions in futures contracts as a hedging device may subject the Fund to
a number of risks. Successful use of futures contracts by the Fund is subject
to the ability of the Investment Adviser or Sub-Adviser to correctly antici-
pate movements in the direction of the market. In addition, there may be an
imperfect correlation, or no correlation at all, between movements in the
price of the futures contracts and movements in the price of the securities
being hedged. Further, there is no assurance that a liquid market will exist
for any particular futures contract at any particular time. Consequently, the
Fund may realize a loss on a futures transaction that is not offset by a fa-
vorable movement in the price of securities which it holds or intends to pur-
chase or may be unable to close a futures position in the event of adverse
price movements. Any income from investments in futures contracts will be tax-
able.
Investment Company Securities
Subject to the limit on investments in taxable obligations described above,
the Fund may invest in securities issued by other investment companies which
invest in high-quality, short-term securities and which determine their net
asset value per share based on the am ortized cost or penny-rounding method.
In addition to the advisory fees and other expenses the Fund bears directly in
connection with its own operations, as a shareholder of another investment
company, the Fund would bear its pro rata portion of the other investment
company's advisory fees and other expenses. As such, the Fund's shareholders
would indirectly bear the expenses of the Fund and the other investment compa-
ny, some or all of which would be duplicative. Such securities will be ac-
quired by the Fund within the limits prescribed by the Investment Company Act
of 1940 (the "1940 Act") which include, subject to certain exceptions, a pro-
hibition against the Fund investing more than 10% of the value of its total
assets in such securities.
Repurchase Agreements
The Fund may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually agreed upon date and price ("repur-
chase agreements"). The Fund will enter into repurchase agreements only with
financial institutions that are deemed to be creditworthy by the Investment
Adviser or Sub-Adviser, pursuant to guidelines established by Excelsior Tax-
Exempt Fund's Board of Directors. The Fund will not enter into repurchase
agreements with the Investment Adviser, the Sub-Adviser or any of their affil-
iates. Repurchase agreements with remaining maturities in excess of seven days
will be considered to be illiquid securities and will be subject to the 10%
limit on such investments described below.
The seller under a repurchase agreement will be required to maintain the
value of the securities which are subject to the agreement and held by the
Fund at not less than the repurchase price. Default or bankruptcy of the
seller would, however, expose the Fund to possible delay in connection with
the disposition of the underlying securities or loss to the extent that pro-
ceeds from a sale of the underlying securities were less than the repurchase
price under the agreement. Income on the repurchase agreements will be tax-
able.
6
<PAGE>
ILLIQUID SECURITIES
The Fund will not knowingly invest more than 10% of the value of its net as-
sets in securities that are illiq- uid. The Fund may purchase securities which
are not registered under the Securities Act of 1933 (the "Act") but which can
be sold to "qualified institutional buyers" in accordance with Rule 144A under
the Act. Any such security will not be considered illiquid so long as it is
determined by the Investment Adviser or Sub-Adviser, acting under guidelines
approved and monitored by the Board, that an adequate trading market exists
for that security. This investment practice could have the effect of increas-
ing the level of illiquidity in the Fund during any period that qualified in-
stitutional buyers become uninterested in purchasing these restricted securi-
ties.
PORTFOLIO TURNOVER
The Fund may sell a portfolio investment immediately after its acquisition if
the Investment Adviser or Sub-Adviser believes that such a disposition is con-
sistent with the Fund's investment objective. The rate of portfolio turnover
will not be a limiting factor in making portfolio decisions. A high rate of
portfolio turnover may involve correspondingly greater transaction costs which
will ultimately be borne by the Fund's shareholders and may result in the re-
alization of substantial net capital gains. To the extent that net short-term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for Federal income tax purposes. (See "Taxes-- Fed-
eral").
RISK FACTORS
The Fund intends to follow the diversification standards set forth in the
1940 Act except to the extent the Investment Adviser or Sub-Adviser determines
that non-diversification is appropriate in order to maximize the percentage of
the Fund's assets that are California Municipal Obligations. The investment
return on a non-diversified portfolio typically is dependent upon the perfor-
mance of a smaller number of securities relative to the number of securities
held in a diversified portfolio. The Fund's assumption of large positions in
the obligations of a small number of issuers will affect the value of the
Fund's portfolio to a greater extent than that of a diversified portfolio in
the event of changes in the financial condition or in the market's assessment
of the issuers.
Although the Fund does not presently intend to do so on a regular basis, it
may invest more than 25% of its assets in Municipal Obligations the interest
on which is paid solely from revenues on similar projects if such investment
is deemed necessary or appropriate by the Investment Adviser or Sub-Adviser.
To the extent that the Fund's assets are concentrated in Municipal Obligations
payable from revenues on similar projects, the Fund will be subject to the
particular risks presented by such projects to a greater extent than it would
be if its assets were not so concentrated.
The Fund's concentration in California Municipal Obligations involves certain
risks. Payment of the interest and principal of California Municipal Obliga-
tions depends on the continuing ability of their issuers to meet their obliga-
tions thereunder. Investors should consider the greater risk inherent in the
Fund's concentration in California Municipal Obligations versus the safety
that comes with a less geographically concentrated investment portfolio, and
should compare the yield available on a portfolio of California issues with
the yield of a more diversified portfolio including non-California issues be-
fore making an investment decision.
Many of the Fund's California Municipal Obligations are likely to be obliga-
tions of California governmental issuers that rely to one extent or another on
real property taxes as a source of revenue. "Proposition Thirteen" and similar
California constitutional and statutory amendments and initiatives in recent
years have restricted the ability of California taxing entities to increase
real property tax revenues. Other initiatives approved by California voters in
recent years, through limiting various other taxes, have re-
7
<PAGE>
sulted in a substantial reduction in state revenues. Decreased state revenues
may result in reductions in allocations of state revenues to local govern-
ments.
Because of the complex nature of the various initiatives mentioned above and
certain possible ambiguities and inconsistencies in their terms and the scope
of various exemptions and exceptions, as well as the impossibility of predict-
ing the level of future appropriations for state and local governmental enti-
ties, the impact of these initiatives and related measures on the ability of
California governmental issuers to pay interest or repay principal on their
obligations is difficult to determine.
In addition to the various initiatives noted above, economic factors have had
an adverse impact on the California economy. Earlier in the decade, economic
factors such as declines in tourism and rising unemployment reduced revenues
to the state government at a time when expenses of state government such as
education costs, various welfare costs and other expenses were rising. Such
economic factors adversely impacted the ability of state and local California
governmental entities to repay debt and these factors, and others that cannot
be predicted, may have an adverse impact in the future.
In December 1994, Orange County, California and its Investment Pool filed
for bankruptcy. In April 1996, the County emerged from bankruptcy after clos-
ing on a $900 million recovery bond deal. At that time, the County and its fi-
nancial advisors stated that the County had emerged from the bankruptcy with-
out any structural fiscal problems and assured that the County would not slip
back into bankruptcy. However, for many of the cities, schools and special
districts that lost money in the County's Investment Pool, repayment remains
contingent on the outcome of litigation which is pending against investment
firms and other finance professionals. Consequently, it is impossible to de-
termine the ultimate impact on these issuers of the bankruptcy and its after-
math.
Other considerations affecting the Fund's investments in California Municipal
Obligations are summarized in the Statement of Additional Information.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest thereon from Federal income tax (and, with respect to Cali-
fornia Municipal Obligations, to the exemption of interest thereon from Cali-
fornia state personal income taxes) are rendered by bond counsel to the re-
spective issuers at the time of issuance. The Fund, its Investment Adviser and
its Sub-Adviser will not review the proceedings relating to the issuance of
Municipal Obligations or the basis for such opinions.
INVESTMENT LIMITATIONS
The Fund's following investment limitations may not be changed without the
vote of a majority of the Fund's outstanding Shares (as defined under
"Miscellaneous").
The Fund may not:
1. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge or hypothecate any assets except in con-
nection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the
time of such borrowing, provided that the Fund may enter into futures con-
tracts and futures options. (This borrowing provision is included solely to
facilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) The Fund may not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding; and
2. Purchase any securities which would cause more than 25% of the value of
its total assets at the time of purchase to be invested in the securities of
8
<PAGE>
one or more issuers conducting their principal business activities in the
same industry; provided that there is no limitation with respect to domestic
bank obligations and securities issued or guaranteed by the United States;
any state or territory; any possession of the U.S. Government; the District
of Columbia; or any of their authorities, agencies, instrumentalities, or po-
litical sub-divisions.
* * *
The Fund will not purchase securities of any one issuer if, as a result, more
than 5% of the value of the Fund's total assets would be invested in the secu-
rities of such issuer, except that (a) up to 50% of the value of the Fund's as-
sets may be invested without regard to this 5% limitation, provided that no
more than 25% of the value of the Fund's total assets are invested in the secu-
rities of any one issuer; and (b) the foregoing 5% limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or instru-
mentalities. For purposes of this policy, (a) a security is considered to be
issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only
by the assets and revenues of a non-governmental user, such non-governmental
user; (b) in certain circumstances, the guarantor of a guaranteed security may
also be considered to be an issuer in connection with such guarantee; and (c)
securities issued or guaranteed by the United States Government, its agencies
or instrumentalities (including securities backed by the full faith and credit
of the United States) are deemed to be U.S. Government obligations. This policy
may be changed by the Board of Directors of Excelsior Tax-Exempt Fund upon 30
days' written notice to shareholders.
If a percentage limitation is satisfied at the time of investment, a later in-
crease or decrease in such percentage resulting from a change in value of the
Fund's portfolio securities will not constitute a violation of such limitation.
PRICING OF SHARES
The net asset value of the Fund's Shares is determined and priced for pur-
chases and redemptions at the close of regular trading hours on the New York
Stock Exchange (the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset
value and pricing for the Fund's Shares are determined on each day the Exchange
and the Investment Adviser are open for business ("Business Day"). Currently,
the holidays which the Fund observes are: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas. Net asset
value per share for purposes of pricing sales and redemptions is calculated by
dividing the value of all securities and other assets allocable to the Fund,
less the liabilities charged to the Fund, by the number of outstanding Shares.
Portfolio securities in the Fund for which market quotations are readily
available (other than debt securities maturing in 60 days or less) are valued
at market value. Securities and other assets for which market quotations are
not readily available are valued at fair value, pursuant to guidelines adopted
by Excelsior Tax-Exempt Fund's Board of Directors. Absent unusual circumstanc-
es, portfolio securities maturing in 60 days or less are normally valued at am-
ortized cost. A futures contract is valued at the last sales price quoted on
the principal exchange or board of trade on which such contract is traded or,
in the absence of a sale, the mean between the last bid and asked prices. The
net asset value of the Fund will fluctuate as the market value of the Fund's
portfolio securities changes in response to changing market rates of interest
and other factors.
The Fund's administrators have undertaken to price the securities in the
Fund's portfolio and may use one or more pricing services to value certain
portfolio securities where the prices provided are believed to reflect the fair
market value of such securities. The methods used by the pricing services and
the valuations so established will be reviewed by the administrators un-
9
<PAGE>
der the general supervision of Excelsior Tax-Exempt Fund's Board of Directors.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares are continuously offered for sale by Excelsior Tax-Exempt Fund's spon-
sor and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-
owned subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal business address is Clearing Operations, P.O. Box
897, Pittsburgh, PA 15230-0897.
PURCHASE OF SHARES
The Distributor has established several procedures for purchasing Shares in
order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by
institutions ("Institutional Investors" and, collectively with Direct Invest-
ors, "Investors"). Shares may also be purchased by customers ("Customers") of
the Investment Adviser, its affiliates and correspondent banks, and other in-
stitutions ("Shareholder Organizations") that have entered into shareholder
servicing agreements with Excelsior Tax-Exempt Fund. A Shareholder Organiza-
tion may elect to hold of record Shares for its Customers and to record bene-
ficial ownership of Shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility
to transmit to the Distributor all purchase orders for its Customers and to
transmit, on a timely basis, payment for such orders to Chase Global Funds
Services Company ("CGFSC"), the Fund's sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases and redemptions will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a Share-
holder Organization may elect to establish its Customers' accounts of record
with CGFSC. In this event, even if the Shareholder Organization continues to
place its Customers' purchase and redemption orders with the Fund, CGFSC will
send confirmations of such transactions and periodic account statements di-
rectly to Customers. A Shareholder Organization may also elect to establish
its Customers as record holders.
Excelsior Tax-Exempt Fund enters into shareholder servicing agreements with
Shareholder Organizations which agree to provide their Customers various
shareholder administrative services with respect to their Shares (hereinafter
referred to as "Service Organizations"). Shares in the Fund bear the expense
of fees payable to Service Organizations for such services. See "Management of
the Fund--Service Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly in accordance with procedures described below
under "Purchase Procedures."
PUBLIC OFFERING PRICE
The public offering price for the Shares is the sum of the net asset value of
the Shares purchased plus a sales load according to the table below:
<TABLE>
<CAPTION>
REALLOWANCE
TOTAL SALES CHARGES TO DEALERS
------------------------------ --------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE VALUE PER SHARE PER SHARE
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000................. 4.50% 4.71% 4.00%
$50,000 to $99,999................ 4.00 4.17 3.50
$100,000 to $249,999.............. 3.50 3.63 3.00
$250,000 to $499,999.............. 3.00 3.09 2.50
$500,000 to $999,999.............. 2.00 2.05 1.50
$1,000,000 to $1,999,999.......... 1.00 1.00 .50
$2,000,000 and over............... .50 .50 .25
</TABLE>
10
<PAGE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
At various times the Distributor may implement programs under which a deal-
er's sales force may be eligible to win nominal awards for certain sales ef-
forts or under which the Distributor will reallow to any dealer that sponsors
sales contests or recognition programs conforming to criteria established by
the Distributor, or participates in sales programs sponsored by the Distribu-
tor, an amount not exceeding the total applicable sales charges on the sales
generated by the dealer at the public offering price during such programs. Al-
so, the Distributor in its discretion may from time to time, pursuant to ob-
jective criteria established by the Distributor, pay fees to qualifying deal-
ers for certain services or activities which are primarily intended to result
in sales of Shares of the Fund. If any such program is made available to any
dealer, it will be made available to all dealers on the same terms and condi-
tions. Payments made under such programs will be made by the Distributor out
of its own assets and not out of the assets of the Fund. These programs will
not change the price of Shares or the amount that the Fund will receive from
such sales.
In addition, the Distributor may offer to pay a fee from its own assets (in-
cluding any portion of the sales load retained by the Distributor) to finan-
cial institutions as financial assistance for the continuing investment of
customers' assets in the Fund or for providing substantial marketing, sales
and operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the at-
tributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations
and partnerships (excluding full service broker/dealers and financial plan-
ners, registered investment advisers and depository institutions not covered
by the exemptions in (d) and (e) below); (d) financial planners and registered
investment advisers not affiliated with or clearing purchases through full
service broker/dealers; (e) purchases of Shares by depository institutions for
their own account as principal; (f) exchange transactions (described below un-
der "Investor Programs--Exchange Privilege") where the Shares being exchanged
were acquired in connection with the distribution of assets held in a trust,
agency or custodial account maintained with the trust department of a bank;
(g) corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and
Keogh accounts) sponsored by the Distributor and IRA accounts sponsored by the
Investment Adviser; (h) company-sponsored employee pension or retirement plans
making direct
investments in the Fund; (i) purchases of Shares by officers, trustees, direc-
tors, employees, former employees and retirees of Excelsior Tax-Exempt Fund,
Excelsior Funds, Inc. ("Excelsior Fund"), Excelsior Institutional Trust, Ex-
celsior Funds, the Investment Adviser, the Distributor or of any direct or in-
direct affiliate of any of them; (j) purchases of Shares by all beneficial
shareholders of Excelsior Tax-Exempt Fund or Excelsior Fund as of May 22,
1989; (k) purchases of Shares by investment advisers registered under the In-
vestment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Excelsior Tax-Exempt Fund, Excel-
sior Fund, Excelsior Institutional Trust or Excelsior Funds; (m) purchases of
shares by investors who are members of affinity groups serviced by USAffinity
Investments Limited Partnership; and (n) customers of certain financial insti-
tutions who purchase Shares through a registered repre-
11
<PAGE>
sentative 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 trans-
actions. Investors who have previously redeemed shares in an "Eligible Fund"
(as defined below) on which a sales load has been paid also have a one-time
privilege of purchasing shares of another "Eligible Fund" at net asset value
without a sales charge, provided that such privilege will apply only to pur-
chases made within 30 calendar days from the date of redemption and only with
respect to the amount of the redemption. These exemptions to the imposition of
a sales load are due to the nature of the investors and/or reduced sales ef-
fort that will be needed in obtaining investments.
Quantity Discounts
An investor in the Fund may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify CGFSC
at the time of purchase that he or she would like to take advantage of any of
the discount plans described below. Upon such notification, the investor will
receive the lowest applicable sales charge. Quantity discounts may be modified
or terminated at any time and are subject to confirmation of an investor's
holdings through a check of appropriate records. For more information about
quantity discounts, please call (800) 446-1012 or contact your Shareholder Or-
ganization.
Rights of Accumulation. A reduced sales load applies to any purchase of
shares of any portfolio of Excelsior Tax-Exempt Fund and Excelsior Fund that
is sold with a sales load ("Eligible Fund") where an investor's then current
aggregate investment is $50,000 or more. "Aggregate investment" means the to-
tal of: (a) the dollar amount of the then current purchase of shares of an El-
igible Fund and (b) the value (based on current net asset value) of previously
purchased and beneficially owned shares of any Eligible Fund on which a sales
load has been paid. If, for example, an investor beneficially owns shares of
one or more Eligible Funds with an aggregate current value of $49,000 on which
a sales load has been paid and subsequently purchases shares of an Eligible
Fund having current value of $1,000, the load applicable to the subsequent
purchase would be reduced to 4.00% of the offering price. Similarly, with re-
spect to each subsequent investment, all shares of Eligible Funds that are
beneficially owned by the investor at the time of investment may be combined
to determine the applicable sales load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below
and in the Letter of Intent. To compute the applicable sales load, the offer-
ing price of shares of an Eligible Fund on which a sales load has been paid,
beneficially owned by an investor on the date of submission of the Letter of
Intent, may be used as a credit toward completion of the Letter of Intent.
However, the reduced sales load will be applied only to new purchases.
CGFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load
reduction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor
will be requested to remit an amount equal to the difference between the sales
load actually paid and the sales load applicable to the total purchases. If
such remittance is not received within 20 days, CGFSC, as attorney-in-fact
pursuant to the terms of the Letter of Intent and at the
12
<PAGE>
Distributor's direction, will redeem an appropriate number of shares held in
escrow to realize the difference. Signing a Letter of Intent does not bind an
investor to purchase the full amount indicated at the sales load in effect at
the time of signing, but an investor must complete the intended purchase in ac-
cordance with the terms of the Letter of Intent to obtain the reduced sales
load. To apply, an investor must indicate his or her intention to do so under a
Letter of Intent at the time of purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse purchas-
ing securities for his, her or their own account or for the account of any mi-
nor children, or the aggregate investments of a trustee or custodian of any
qualified pension or profit sharing plan or IRA established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompanying this Prospectus and mailing it, together with a
check payable to Excelsior Funds, to:
Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in the Fund may be made at any
time by sending to the above address a check payable to Excelsior Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from
CGFSC; or (c) a letter stating the amount of the investment and the account
number in which the investment is to be made. Institutional Investors may pur-
chase Shares by transmitting their purchase orders to CGFSC by telephone at
(800) 446-1012 or by terminal access. Institutional Investors must pay for
Shares with Federal funds or funds immediately available to CGFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to CGFSC. Prior to
making an initial investment by wire, an Investor must telephone CGFSC at
(800) 446-1012 (from overseas, call (617) 557-8280) for instructions. Federal
funds and registration instructions should be wired through the Federal Reserve
System to:
The Chase Manhattan Bank, N.A.
ABA #021000021
Excelsior Funds, Account No. 9102732915
For further credit to:
Excelsior Funds
Wire Control Number
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Appli-
cation accompanying this Prospectus and forward it to CGFSC. Redemptions by In-
vestors will not be processed until the completed Application for purchase of
Shares has been received by CGFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500. The minimum subsequent in-
vestment for both types of investors is $50. Customers may agree with a partic-
ular Shareholder Organization to make a minimum purchase with respect to their
accounts. Depending upon the terms of the particular account, Shareholder Orga-
nizations may charge a Customer's account fees for au-
13
<PAGE>
tomatic investment and other cash management services provided. Excelsior Tax-
Exempt Fund reserves the right to reject any purchase order, in whole or in
part, or to waive any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the responsi-
bility of the Shareholder Organizations to transmit redemption orders to CGFSC
and credit such Customer accounts with the redemption proceeds on a timely ba-
sis. Redemption orders for Institutional Investors must be transmitted to CGFSC
by telephone at (800) 446-1012 or by terminal access. No charge for wiring re-
demption payments to Shareholder Organizations or Institutional Investors is
imposed by Excelsior Tax-Exempt Fund, although Shareholder Organizations may
charge a Customer's account for wiring redemption proceeds. Information relat-
ing to such redemption services and charges, if any, is available from the
Shareholder Organizations. An investor redeeming Shares through a registered
investment adviser or certified financial planner may incur transaction charges
in connection with such redemptions. Such investors should contact their regis-
tered investment adviser or certified financial planner for further information
on transaction fees. Investors may redeem all or part of their Shares in accor-
dance with any of the procedures described below (these procedures also apply
to Customers of Shareholder Organizations for whom individual accounts have
been established with CGFSC).
REDEMPTION BY MAIL
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to CGFSC must (i) state the number of Shares to
be redeemed, (ii) identify the shareholder account number and tax identifica-
tion number, and (iii) be signed by each registered owner exactly as the Shares
are registered. If the Shares to be redeemed were issued in certificate form,
the certificates must be endorsed for transfer (or accompanied by a duly exe-
cuted stock power) and must be submitted to CGFSC together with the redemption
request. A redemption request for an amount in excess of $50,000 per account,
or for any amount if the proceeds are to be sent elsewhere than the address of
record, must be accompanied by signature guarantees from any eligible guarantor
institution approved by CGFSC in accordance with its Standards, Procedures and
Guidelines for the Acceptance of Signature Guarantees ("Signature Guarantee
Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by CGFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from CGFSC at (800) 446-1012 or at the
address given above. CGFSC may require additional supporting documents for re-
demptions made by corporations, executors, administrators, trustees and guardi-
ans. A redemption request will not be deemed to be properly received until
CGFSC receives all required documents in proper form. Payment for Shares re-
deemed will ordinarily be made by mail within five Business Days after proper
receipt by CGFSC of the redemption request. Questions with respect to the
proper form for redemption requests should be directed to CGFSC at (800) 446-
1012 (from overseas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing CGFSC by
wire or telephone to wire the redemption proceeds directly
14
<PAGE>
to the Direct Investor's account at any commercial bank in the United States.
Direct Investors who are shareholders of record may also redeem Shares by
instructing CGFSC by telephone to mail a check for redemption proceeds of $500
or more to the shareholder of record at his or her address of record. Institu-
tional Investors may also redeem Shares by instructing CGFSC by telephone at
(800) 446-1012 or by terminal access. Only redemptions of $500 or more will be
wired to a Direct Investor's account. An $8.00 fee for each wire redemption by
a Direct Investor is deducted by CGFSC from the proceeds of the redemption.
The redemption proceeds for Direct Investors must be paid to the same bank and
account as designated on the Application or in written instructions subse-
quently received by CGFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, a Direct Investor must send a written request to Excelsior Tax-Ex-
empt Fund, c/o CGFSC, at the address listed above under "Redemption by Mail."
Such requests must be signed by the Direct Investor, with signatures guaran-
teed (see "Redemption by Mail" above, for details regarding signature guaran-
tees). Further documentation may be requested.
CGFSC and the Distributor reserve the right to refuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Excelsior
Tax-Exempt Fund, CGFSC or the Distributor. EXCELSIOR TAX-EXEMPT FUND, CGFSC
AND THE DISTRIBUTOR WILL NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EX-
PENSE FOR ACTING UPON TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO
BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE,
EXCELSIOR TAX-EXEMPT FUND WILL USE SUCH PROCEDURES AS ARE CONSIDERED REASON-
ABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMATION AS TO
ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Excelsior Tax-Exempt Fund and CGFSC reserve the right not to
honor the redemption until CGFSC is reasonably satisfied that the check has
been collected in accordance with the applicable banking regulations which may
take up to 15 days. A Direct Investor who anticipates the need for more imme-
diate access to his or her investment should purchase Shares by Federal funds
or bank wire or by certified or cashier's check. Banks normally impose a
charge in connection with the use of bank wires, as well as certified checks,
cashier's checks and Federal funds. If a Direct Investor's purchase check is
not collected, the purchase will be cancelled and CGFSC will charge a fee of
$25.00 to the Direct Investor's account.
During periods of substantial economic or market change, telephone redemp-
tions may be difficult to complete. If an investor is unable to contact CGFSC
by telephone, the Investor may also deliver the redemption request to CGFSC in
writing at the address noted above under "How to Purchase and Redeem Shares--
Redemption by Mail."
Other Redemption Information
Except as described in "Investor Programs" below, Investors may be required
to redeem Shares after 60 days' written notice if due to investor redemptions
the balance in the particular account with respect to the Fund remains below
$500. If a Customer has agreed with a particular Shareholder Organization to
maintain a minimum balance in his or her account at the institution with re-
spect to Shares of the Fund, and the balance in such account falls below that
minimum, the Customer may be obliged by the Shareholder Organization to redeem
all or part of his or her Shares to the extent necessary to maintain the re-
quired minimum balance.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day. Purchase orders received and accepted after the
close of regular trading hours on the Exchange are priced at
15
<PAGE>
the net asset value per Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by Excelsior Tax-
Exempt Fund, exchange Shares of the Fund having a value of at least $500 for
shares of the same series of any other portfolio offered by Excelsior Tax-Ex-
empt Fund or Excelsior Fund, or for Trust Shares of Excelsior Institutional
Trust, provided that such other shares may legally be sold in the state of the
Investor's residence.
Excelsior Tax-Exempt Funds, Inc. currently offers, in addition to the Fund,
five other portfolios:
Tax-Exempt Money Fund, a diversified tax-exempt money market fund seeking a
moderate level of current interest income exempt from Federal income taxes
through investing primarily in high-quality municipal obligations maturing
within 13 months;
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through in-
vestments in municipal obligations and having a dollar-weighted average port-
folio maturity of 1 to 3 years;
Intermediate-Term Tax-Exempt Fund, a diversified fund seeking a high level
of current income exempt from Federal income taxes through investments in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of three to ten years;
Long-Term Tax-Exempt Fund, a diversified fund attempting to maximize over
time current income exempt from Federal income taxes, investing in municipal
obligations and having a dollar-weighted average portfolio maturity of 10 to
30 years; and
New York Intermediate-Term Tax-Exempt Fund, a non-diversified fund designed
to provide New York investors with a high level of current interest income
exempt from Federal and, to the extent possible, New York state and New York
City income taxes; this fund invests primarily in New York municipal obliga-
tions and has a dollar-weighted average portfolio maturity of three to ten
years.
Excelsior Funds, Inc. currently offers twenty investment portfolios:
Money Fund, a money market fund seeking as high a level of current income as
is consistent with liquidity and stability of principal through investments
in high-quality money market instruments maturing within 13 months;
Government Money Fund, a money market fund seeking as high a level of cur-
rent income as is consistent with liquidity and stability of principal
through investments in obligations issued or guaranteed by the U.S. Govern-
ment, its agencies and instrumentalities and repurchase agreements collater-
alized by such obligations;
Treasury Money Fund, a money market fund seeking current income generally
exempt from state and local income taxes through investments in direct short-
term obligations issued by the U.S. Treasury and certain agencies or instru-
mentalities of the U.S. Government;
Short-Term Government Securities Fund, a fund seeking a high level of cur-
rent income by investing principally in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations, and having a dollar-weighted aver-
age portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of cur-
rent interest income by investing principally in investment grade or better
debt obligations and money market instruments, and having a dollar-weighted
average portfolio maturity of 3 to 10 years;
Managed Income Fund, a fund seeking higher current income through invest-
ments in investment
16
<PAGE>
grade debt obligations, U.S. Government obligations and money market instru-
ments;
Equity Fund, a fund seeking primarily long-term capital appreciation through
investments in a diversified portfolio of primarily equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefiting from the availability, development
and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or companies that are most effective at obtaining and ap-
plying productivity enhancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based companies benefitting from their position as effec-
tive and strong competitors on a global basis;
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations;
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments in all coun-
tries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
Excelsior Institutional Trust currently offers Trust Shares in two investment
portfolios as follows:
Optimum Growth Fund, a fund seeking superior, risk-adjusted total return
through investments in a diversified portfolio of equity securities whose
growth prospects, in the opinion of its investment adviser, appear to exceed
that of the overall market; and
Value Equity Fund, a fund seeking long-term capital appreciation through in-
vestments in a diversified
17
<PAGE>
portfolio of equity securities whose market value, in the opinion of its in-
vestment adviser, appears to be undervalued relative to the marketplace.
An exchange involves a redemption of all or a portion of the Shares in the
Fund and the investment of the redemption proceeds in shares of another portfo-
lio of Excelsior Tax-Exempt Fund, Excelsior Fund or Excelsior Institutional
Trust. The redemption will be made at the per Share net asset value of the
Shares being redeemed next determined after the exchange request is received.
The shares of the portfolio to be acquired will be purchased at the per share
net asset value of those shares (plus any applicable sales load) next deter-
mined after acceptance of the exchange request. No sales load will be payable
on shares to be acquired through an exchange to the extent that a sales load
was previously paid on the Shares being exchanged.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in the Fund. For fur-
ther information regarding exchange privileges, shareholders should call (800)
446-1012 (from overseas, call (617) 557-8280). Investors exercising the ex-
change privilege with the other portfolios of Excelsior Tax-Exempt Fund, Excel-
sior Fund or Excelsior Institutional Trust should request and review the pro-
spectuses of such Funds. Such prospectuses may be obtained by calling the tele-
phone numbers listed above. In order to prevent abuse of this privilege to the
disadvantage of other shareholders, Excelsior Fund, Excelsior Tax-Exempt Fund
and Excelsior Institutional Trust reserve the right to limit the number of ex-
change requests of Investors and Customers of Shareholder Organizations to no
more than six per year. Excelsior Tax-Exempt Fund may modify or terminate the
exchange program at any time upon 60 days' written notice to shareholders, and
may reject any exchange request. EXCELSIOR TAX-EXEMPT FUND, EXCELSIOR FUND, EX-
CELSIOR INSTITUTIONAL TRUST, CGFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE FOR
THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REASONABLY
BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS
ARE GENUINE, EXCELSIOR TAX-EXEMPT FUND, EXCELSIOR FUND AND EXCELSIOR INSTITU-
TIONAL TRUST WILL USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING
RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRA-
TION.
For Federal income tax purposes, an exchange of Shares is a taxable event and,
accordingly, a capital gain or loss may be realized by an investor. Before mak-
ing an exchange, an investor should consult a tax or other financial adviser to
determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of the Fund with a value of $10,000 or more may
establish a Systematic Withdrawal Plan. The Investor may request a declining-
balance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Applica-
tion contained in this Prospectus and mail it to CGFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling (800) 446-1012 (from overseas, call (617) 557-8280).
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (minimum
of $50 per transaction) at regular intervals selected by the Investor. The min-
imum initial investment for an Automatic Investment Program account is $50.
Provided the Investor's
18
<PAGE>
financial institution allows automatic withdrawals, Shares are purchased by
transferring funds from an Investor's checking, bank money market or NOW ac-
count designated by the Investor. At the Investor's option, the account desig-
nated will be debited in the specified amount, and Shares will be purchased,
once a month, on either the first or fifteenth day, or twice a month, on both
days.
The Automatic Investment Program is one means by which an Investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time mar-
ket performance, a fixed dollar amount is invested in Shares at predetermined
intervals. This may help Investors to reduce their average cost per share be-
cause the agreed upon fixed investment amount allows more Shares to be pur-
chased during periods of lower share prices and fewer Shares during periods of
higher prices. In order to be effective, Dollar Cost Averaging should usually
be followed on a sustained, consistent basis. Investors should be aware, how-
ever, that Shares bought using Dollar Cost Averaging are purchased without re-
gard to their price on the day of investment or to market trends. In addition,
while Investors may find Dollar Cost Averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his Shares at a price which
is lower than their purchase price.
To establish an Automatic Investment account permitting Investors to use the
Dollar Cost Averaging investment method described above, an Investor must com-
plete the Supplemental Application contained in this Prospectus and mail it to
CGFSC. An Investor may cancel his participation in this Program or change the
amount of purchase at any time by mailing written notification to CGFSC, P.O.
Box 2798, Boston, MA 02208-2798 and notification will be effective three Busi-
ness Days following receipt. Excelsior Tax-Exempt Fund may modify or terminate
this privilege at any time or charge a service fee, although no such fee cur-
rently is contemplated. An Investor may also implement the Dollar Cost Averag-
ing method on his own initiative or through other entities.
DIVIDENDS AND DISTRIBUTIONS
The Fund's net income for dividend purposes consists of (i) all accrued in-
come, whether taxable or tax-exempt, plus discount earned on the Fund's as-
sets, less (ii) amortization of premium on such assets, accrued expenses di-
rectly attributable to the Fund, and the general expenses or the expenses com-
mon to more than one Fund (e.g., legal, administrative, accounting, and Direc-
tors' fees) of Excelsior Tax-Exempt Fund, prorated to the Fund on the basis of
its relative net assets.
The net investment income of the Fund is declared daily as a dividend to the
persons who are shareholders of the Fund at the opening of business on the day
of declaration. All such dividends are paid within ten days after the end of
each month or within seven days after the redemption of all of a shareholder's
Shares. Net realized capital gains are distributed at least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of Shareholder Organizations
will receive dividends and distributions in additional Shares (as determined
on the payable date), unless they have requested in writing (received by CGFSC
at Excelsior Tax-Exempt Fund's address prior to the payment date) to receive
dividends and distributions in cash. Reinvested dividends and distributions
receive the same tax treatment as those paid in cash.
TAXES
FEDERAL
The Fund has qualified and intends to continue to qualify as a "regulated in-
vestment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Such qualification generally relieves the Fund of liability for Fed-
eral income taxes to the extent that the Fund's earnings are distributed in
accordance with the Code.
19
<PAGE>
The Fund's policy is to pay its shareholders dividends each year equal to at
least the sum of 90% of its exempt-interest income (net of certain deductions)
and 90% of its investment company taxable income, if any. Some dividends de-
rived from exempt-interest income ("exempt-interest dividends") may be treated
by the Fund's shareholders as items of interest excludable from their gross
income under Section 103(a) of the Code, unless under the circumstances appli-
cable to the particular shareholder, exclusion would be disallowed. (See
Statement of Additional Information--"Additional Information Concerning Tax-
es.")
If the Fund should hold certain private activity bonds issued after August 7,
1986, shareholders must include, as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
their Federal alternative minimum taxable income for purposes of determining
liability (if any) for the 26% to 28% alternative minimum tax applicable to
individuals and the 20% alternative minimum tax and the environmental tax ap-
plicable to corporations. Corporate shareholders also must take all exempt-in-
terest dividends into account in determining certain adjustments under the
Federal alternative minimum tax. The environmental tax applicable to corpora-
tions is imposed at the rate of .12% on the excess of the corporation's modi-
fied Federal alternative minimum taxable income over $2 million. Shareholders
receiving Social Security benefits should note that all exempt-interest divi-
dends will be taken into account in determining the taxability of such
benefits.
Dividends payable by the Fund which are derived from taxable income or from
long-term or short-term capital gains will be subject to Federal income tax,
whether such dividends are paid in the form of cash or additional Shares. An
investor considering buying Shares of the Fund on or just before the record
date of a taxable dividend should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
him.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by the Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. If a shareholder holds Shares for six months or less
and during that time receives an exempt-interest dividend on those Shares, any
loss recognized on the sale or exchange of those Shares will be disallowed to
the extent of the exempt-interest dividend. Generally, a shareholder may in-
clude sales charges incurred upon the purchase of Shares in his tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of such Shares for shares of another portfolio within 90 days of the
purchase and is able to reduce the sales charges applicable to the new shares
(by virtue of the exchange privilege), the amount equal to reduction may not
be included in the tax basis of the shareholder's exchanged Shares for the
purpose of determining gain or loss, but may be included (subject to the limi-
tation) in the tax basis of the new shares.
CALIFORNIA
If, at the close of each quarter of its taxable year, at least 50% of the
value of the Fund's total assets consists of California Municipal Obligations
and certain Federal obligations, the Fund will be qualified to pay dividends
exempt from California state personal income tax to its shareholders. The div-
idends exempt from
20
<PAGE>
that tax will be those that come from interest attributable to California Mu-
nicipal Obligations and certain Federal obligations. (Such exemption may not
apply, however, to investors who are "substantial users" or "related persons"
with respect to facilities financed by portfolio securities held by the Fund.
Additional tax information regarding "substantial users" and "related persons"
can be found in the Statement of Additional Information.) With respect to
shareholders subject to California state franchise tax or California state
corporate income tax, dividends may still be taxed as ordinary or capital gain
dividends, despite the personal income tax exemption. Dividends derived from
taxable interest or from capital gains (whether received in cash or in addi-
tional shares) will be subject to California state personal income tax.
Distributions of net investment income may be subject to state or local taxes
other than the California state personal income tax under state or local law,
even though all or a part of those distributions may come from interest on
tax-exempt obligations that, if received directly by shareholders, would be
exempt from such taxes.
MISCELLANEOUS
The foregoing summarizes some of the important tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situa-
tions. Shareholders will be advised at least annually as to the Federal and
California personal income tax consequences of distributions made each year.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of Ex-
celsior Tax-Exempt Fund's Board of Directors. The Statement of Additional In-
formation contains the names of and general background information concerning
Excelsior Tax-Exempt Fund's directors.
INVESTMENT ADVISER AND SUB-ADVISER
United States Trust Company of New York serves as the Investment Adviser to
the Fund. U.S. Trust is a state-chartered bank and trust company. The Invest-
ment Adviser provides trust and banking services to individuals, corporations,
and institutions both nationally and internationally, including investment
management, estate and trust administration, financial planning, corporate
trust and agency banking, and personal and corporate banking. The Investment
Adviser is a member bank of the Federal Reserve System and the Federal Deposit
Insurance Corporation and is one of the twelve members of the New York Clear-
ing House Association.
On June 30, 1996, the Investment Adviser's Asset Management Group had approx-
imately $50.3 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
United States Trust Company of California (the "Sub-Adviser") provides sub-
advisory services to the Fund. The Sub-Adviser is a national bank and a whol-
ly-owned subsidiary of U.S. Trust Corporation. The Sub-Adviser has its princi-
pal offices at 515 South Flower Street, Los Angeles, CA 90071.
The Sub-Adviser manages the Fund, makes decisions with respect to and places
orders for all purchases and sales of the Fund's portfolio securities, and
maintains records relating to such purchases and sales.
The Fund's portfolio manager, Lois G. Ingham, C.F.A., is the person primarily
responsible for the day-to-day management of the Fund's investment portfolio.
Ms. Ingham, a Senior Vice President and Director of Fixed Income Investments,
has been with U.S. Trust Company of California since 1990 and has managed the
Fund since its inception.
For the services provided and expenses assumed pursuant to its Investment Ad-
visory Agreement, the In-
21
<PAGE>
vestment Adviser is entitled to be paid a fee, computed daily and paid month-
ly, at the annual rate of .50% of the average daily net assets of the Fund.
The Sub-Adviser is entitled to receive from the Investment Adviser an annual
fee, computed and paid monthly, at the annual rate of .50% of the average
daily net assets of the Fund.
From time to time, the Investment Adviser and the Sub-Adviser may waive (ei-
ther voluntarily or pursuant to applicable state expense limitations) all or a
portion of the advisory fees payable by the Fund, which waivers may be termi-
nated at any time. See "Management of the Fund--Service Organizations" for ad-
ditional information on fee waivers.
ADMINISTRATORS
CGFSC, Federated Administrative Services and U.S. Trust serve as the Fund's
administrators (the "Administrators") and provide it with general administra-
tive and operational assistance. The Administrators also serve as
administrators to the other portfolios of Excelsior Tax-Exempt Fund and all of
the portfolios of Excelsior Fund and Excelsior Institutional Trust, which are
also advised by the Investment Adviser and its affiliates and distributed by
the Distributor. For the services provided to all portfolios of Excelsior Tax-
Exempt Fund, Excelsior Fund and Excelsior Institutional Trust (except the in-
ternational portfolios of Excelsior Fund and Excelsior Institutional Trust),
the Administrators are entitled jointly to annual fees, computed daily and
paid monthly, based on the combined aggregate average daily net assets of the
three companies (excluding the international portfolios of Excelsior Fund and
Excelsior Institutional Trust) as follows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF EXCELSIOR FUND,
EXCELSIOR TAX-EXEMPT FUND
AND EXCELSIOR INSTITUTIONAL TRUST
(EXCLUDING THE INTERNATIONAL PORTFOLIOS OF
EXCELSIOR FUND AND EXCELSIOR INSTITUTIONAL TRUST) ANNUAL FEE
------------------------------------------------- ----------
<S> <C>
first $200 million................................................... .200%
next $200 million.................................................... .175%
over $400 million.................................................... .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of Excel-
sior Tax-Exempt Fund, Excelsior Fund and Excelsior Institutional Trust are de-
termined in proportion to their relative average daily net assets at the time
of determination. From time to time, the Administrators may waive (either vol-
untarily or pursuant to applicable state expense limitations) all or a portion
of the administration fee payable to them by the Fund, which waivers may be
terminated at any time. See "Management of the Fund--Service Organizations"
for additional information on fee waivers.
SERVICE ORGANIZATIONS
Excelsior Tax-Exempt Fund will enter into an agreement ("Servicing Agree-
ment") with each Service Organization requiring it to provide administrative
support services to its Customers beneficially owning Shares. As a considera-
tion for the administrative services provided to Customers, the Fund will pay
the Service Organization an administrative service fee at the annual rate of
up to .40% of the average daily net asset value of the Fund's Shares held by
the Service Organization's Customers. Such services, which are described more
fully in the Statement of Additional Information under "Management of the
Fund--Service Organizations," may include assisting in processing purchase,
exchange and redemption requests; transmitting and receiving funds in connec-
tion with Customer orders to purchase, exchange or redeem Shares; and provid-
ing periodic statements. Under the terms of the Servicing Agreement, Service
Organizations will be required to provide to Customers a schedule of any fees
that they may charge in connection with a Customer's investments. Until fur-
ther notice, the Investment Adviser and Administrators have voluntarily agreed
to waive fees payable by the Fund in an amount equal to administrative service
fees payable by the Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing
22
<PAGE>
or controlling a registered, open-end investment company continuously engaged
in the issuance of its shares, and prohibit banks generally from issuing, un-
derwriting, selling or distributing securities such as Shares of the Fund, but
such banking laws and regulations do not prohibit such a holding company or af-
filiate or banks generally from acting as investment adviser, transfer agent,
or custodian to such an investment company, or from purchasing shares of such
company for and upon the order of customers. The Investment Adviser, the Sub-
Adviser, CGFSC and certain Shareholder Organizations may be subject to such
banking laws and regulations. State securities laws may differ from the inter-
pretations of Federal law discussed in this paragraph and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser, the Sub-Adviser or other Shareholder
Organizations in connection with purchases of Fund Shares, the Investment Ad-
viser, the Sub-Adviser and such Shareholder Organizations might be required to
alter materially or discontinue the investment services offered by them to Cus-
tomers. It is not anticipated, however, that any resulting change in the Fund's
method of operations would affect its net asset value per Share or result in
financial loss to any shareholder.
DESCRIPTION OF CAPITAL STOCK
Excelsior Tax-Exempt Fund was organized as a Maryland corporation on August 8,
1984. Currently, Excelsior Tax-Exempt Fund has authorized capital of 14 billion
shares of Common Stock, $.001 par value per share, classified into 6 classes of
shares representing 6 investment portfolios currently being offered. Excelsior
Tax-Exempt Fund's Charter authorizes the Board of Directors to classify or re-
classify any class of shares of Excelsior Tax-Exempt Fund into one or more
classes or series. Shares of Class E represent interests in the California Tax-
Exempt Income Fund.
Each Share represents an equal proportionate interest in the Fund and is enti-
tled to such dividends and distributions out of the income earned on the assets
belonging to the Fund as are declared in the discretion of Excelsior Tax-Exempt
Fund's Board of Directors.
Shareholders are entitled to one vote for each full share held, and fractional
votes for fractional shares held, and will vote in the aggregate and not by
class, except as otherwise expressly required by law.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to CGFSC and will not be issued for fractional Shares.
As of September 30, 1996, U.S. Trust held of record substantially all of the
Shares in Excelsior Tax-Exempt Fund as agent or custodian for its customers,
but did not own such Shares beneficially because it did not have voting or
investment discretion with respect to such Shares. U.S. Trust is a wholly-owned
subsidiary of U.S. Trust Corporation.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank, N.A. ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as the custodian of the Fund's assets. Com-
munications to the custodian should be directed to Chase, Mutual Funds Service
Division, 770 Broadway, New York, New York 10003-9598.
U.S. Trust serves as the Fund's transfer and dividend disbursing agent. U.S.
Trust has also entered into a sub-transfer agency arrangement with CGFSC, 73
Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which CGFSC pro-
vides certain transfer agent, dividend disbursement and registrar services to
the Fund.
23
<PAGE>
EXPENSES
Except as noted below, the Investment Adviser, the Sub-Adviser and the Admin-
istrators will bear all expenses in connection with the performance of their
advisory, sub-advisory and administrative services. The Fund will bear the ex-
penses 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 distribu-
tion to shareholders; advisory and administration fees; charges of the custo-
dian, transfer agent and dividend disbursing agent; certain insurance premi-
ums; outside auditing and legal expenses; cost of independent pricing service;
costs of shareholder reports and meetings; and any extraordinary expenses. The
Fund also pays for any brokerage fees and commissions in connection with the
purchase of portfolio securities.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance and yields of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indexes
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the
performance of mutual funds.
Performance and yield data as reported in national financial publications,
including but not limited to Money Magazine, Forbes, Barron's, The Wall Street
Journal and The New York Times, or in publications of a local or regional na-
ture, may also be used in comparing the performance and yields of the Fund.
The Fund may advertise its effective yield which is calculated by dividing
its average daily net investment income per Share during a 30-day (or one
month) base period identified in the advertisement by its maximum offering
price per Share on the last day of the period, and annualizing the result on a
semi-annual basis.
In addition, the Fund may from time to time advertise its "tax-equivalent
yield" to demonstrate the level of taxable yield necessary to produce an af-
ter-tax yield equivalent to that achieved by the Fund. This yield is computed
by increasing the yield of the Fund's Shares (calculated as above) by the
amount necessary to reflect the payment of Federal and California income taxes
at stated tax rates.
From time to time, the Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure
reflects the average percentage change in the value of an investment in the
Fund from the beginning date of the measuring period to the end of the measur-
ing period. Average total return figures will be given for the most recent
one-year period and may be given for other periods as well (such as from the
commencement of the Fund's operations, or on a year-by-year basis). The Fund
may also use aggregate total return figures for various periods, representing
the cumulative change in the value of an investment in the Fund for the spe-
cific period. Both methods of calculating total return assume that dividends
and capital gain distributions made by a Fund during the period are reinvested
in Fund Shares and also reflect the maximum sales load charged by the Fund.
Performance and yields will fluctuate and any quotation of performance and
yield should not be considered as representative of the Fund's future per-
formance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time.
24
<PAGE>
Shareholders should remember that performance and yield are generally func-
tions of the kind and quality of the instruments held in a portfolio, portfo-
lio maturity, operating expenses, and market conditions. Any fees charged by
Shareholder Organizations with respect to accounts of Customers that have in-
vested in Shares will not be included in calculations of yield and
performance.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Fund's
investment operations and annual financial statements audited by the Fund's
independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Excelsior Tax-Exempt Fund or the Fund means, with respect
to the approval of an investment advisory agreement or a change in a fundamen-
tal investment policy, the affirmative vote of the lesser of (a) more than 50%
of the outstanding shares of Excelsior Tax-Exempt Fund or the Fund, or (b) 67%
or more of the shares of Excelsior Tax-Exempt Fund or the Fund present at a
meeting if more than 50% of the outstanding shares of Excelsior Tax-Exempt
Fund or the Fund are represented at the meeting in person or by proxy.
Inquiries regarding the Fund may be directed to the Distributor at the ad-
dress listed under "Distributor."
25
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to:
Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
FOR OVERNIGHT DELIVERY: send to:
Excelsior Funds
c/o Chase Global Funds Services Company--
Transfer Agent
73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "Ex-
celsior Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus en-
titled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is
$500; subsequent investments must be in the minimum amount of $50. Investments
may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organi-
zations, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
26
<PAGE>
- ------------------------------------------------------------------------------
CHASE GLOBAL FUNDS SERVICES COMPANY NEW
CLIENT SERVICES ACCOUNT
[LOGO]EXCELSIOR APPLICATION
P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ACCOUNT REGISTRATION
- ------------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other_________________
Note: Joint tenant registration will be as "joint tenants with right of
survivorship" unless otherwise specified. Trust registrations should specify
name of the trust, trustee(s), beneficiary(ies), and the date of the trust
instrument. Registration for Uniform Gifts/Transfers to Minors should be in the
name of one custodian and one minor and include the state under which the
custodianship is created (using the minor's Social Security Number ("SSN")). For
IRA accounts a different application is required.
- ------------------------------ ----------------------------------------------
Name(s) (please print) Social Security # or Taxpayer Identification #
( )
- ------------------------------ ----------------------------------------------
Name Telephone #
- ------------------------------
Address
- ------------------------------ [_] U.S. Citizen [_] Other (specify)_________
City/State/Zip
- --------------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER FUND
AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "EXCELSIOR FUNDS.")
- --------------------------------------------------------------------------------
INITIAL INVESTMENT INITIAL INVESTMENT
[_] California Tax-Exempt $ ____________ [_] Other ___________ $ ____________
Income Fund
TOTAL INITIAL INVESTMENT: $ ____________
NOTE: If investing A. BY MAIL: Enclosed is a check in the
by wire, you must amount of $ _____ payable to "Excelsior
obtain a Bank Wire Funds."
Control Number. To B. BY WIRE: A bank wire in the amount
do so, please call of $ has been sent to the Fund from
(800) 446-1012 and ------------------ ---------------
ask for the Wire Name of Bank Wire Control
Desk. Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and
dividend distributions will be reinvested in additional
shares unless appropriate boxes below are checked:
[_] All dividends are to be[_] reinvested[_] paid in cash
[_] All capital gains are to be[_] reinvested[_] paid in cash
- -------------------------------------------------------------------------------
ACCOUNT PRIVILEGES
- -------------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint CGFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Excelsior Fund, Excelsior Tax-Exempt Fund,
CGFSC and their directors, officers and employees will not be liable for any
loss, liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Excelsior Fund and Excelsior Tax-Exempt Fund
fail to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize CGFSC to act upon instructions received by telephone
to withdraw $500 or more from my/our account in the Excelsior Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that CGFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*________________________________________
Name of Bank _________________________________________________
Bank A.B.A. Number _______________ Account Number ____________
Bank Address __________________________________________________
City/State/Zip _________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
- --------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
RIGHTS OF ACCUMULATION
- -------------------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this section, listing
all of your accounts including those in your spouse's name, joint accounts and
accounts held for your minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge discount
described in the Prospectus and Statement of Additional Information.
[_] I/We own shares of more than one Fund distributed by Edgewood Services,
Inc. Listed below are the numbers of each of my/our Shareholder
Accounts.
[_] The registration of some of my/our shares differs from that shown on
this application. Listed below are the account number(s) and full
registration(s) in each case.
LIST OF OTHER EXCELSIOR FUND ACCOUNTS:
______________________ _______________________________________
______________________ _______________________________________
______________________ _______________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
- --------------------------------------------------------------------------------
LETTER OF INTENT
- --------------------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in the Prospectus.
Although I am not obligated to purchase, and Excelsior Tax-Exempt Fund is not
obligated to sell, I intend to invest, over a 13-month period beginning on ,
19 , an aggregate amount in Eligible Funds of Excelsior Fund and Excelsior
Tax-Exempt Fund at least equal to (check appropriate box):
<TABLE>
<S> <C> <C> <C> <C> <C>
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000 [_] $2,000,000
</TABLE>
By signing this application, I hereby authorize CGFSC to re-deem an
appropriate number of shares held in escrow to pay any additional sales loads
payable in the event that I do not fulfill the terms of this Letter of Intent.
- --------------------------------------------------------------------------------
AGREEMENTS AND SIGNATURES
- --------------------------------------------------------------------------------
By signing this application, I/we hereby certify under penalty of perjury that
the information on this application is complete and correct and that as
required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form is/are the correct
taxpayer identification number(s) and (2) I/we are not subject to backup
withholding either because I/we have not been notified by the Internal Revenue
Service that I/we are subject to backup withholding, or the IRS has notified
me/us that I am/we are no longer subject to backup withholding. (NOTE: IF ANY
OR ALL OF PART 2 IS NOT TRUE, PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has been provided
above, I/we have applied, or intend to apply, to the IRS or the Social
Security Administration for a TIN or a SSN, and I/we understand that if I/we
do not provide this number to CGFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or TIN, I/we may be
subject to a penalty and a 31% backup withholding on distributions and
redemption proceeds. (Please provide this number on Form W-9. You may request
the form by calling CGFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to purchase shares
of the Excelsior Funds. I/We have received, read and carefully reviewed a copy
of the appropriate Fund's current Prospectus and agree to its terms and by
signing below I/we acknowledge that neither the Fund nor the Distributor is a
bank and that Fund Shares are not deposits or obligations of, or guaranteed or
endorsed by, United States Trust Company of New York, its parent and
affiliates and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
governmental agency; and that an investment in the Fund involves investment
risks, including possible loss of principal amount invested..
X ___________________________________ Date ________________________________
Owner Signature
X ___________________________________ Date ________________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above (including
legal title if signing for a corporation, trust custodial account, etc.).
- --------------------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
- --------------------------------------------------------------------------------
We hereby submit this application for the purchase of shares in accordance
with the terms of our selling agreement with Edgewood Services, Inc., and with
the Prospectus and Statement of Additional Information of each Fund purchased.
We agree to notify CGFSC of any purchases made under the Letter of Intent or
Rights of Accumulation.
--------------------------------------- -------------------------------------
Investment Dealer's Name Source of Business Code
--------------------------------------- -------------------------------------
Main Office Address Branch Number
--------------------------------------- -------------------------------------
Representative's Number Representative's Name
--------------------------------------- -------------------------------------
Branch Address Telephone
--------------------------------------- -------------------------------------
Investment Dealer's Title
Authorized Signature
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CHASE GLOBAL FUNDS SERVICES COMPANY SUPPLEMENTAL
[LOGO] EXCELSTOR CLIENT SERVICES APPLICATION
P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
- --------------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a
change of address
- --------------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
- --------------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked:
All dividends are to be[_] reinvested [_] paid in
cash
All capital gains are to be[_] reinvested [_] paid in
cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered Excelsior Fund. (NOTE: You may NOT open a new Fund account with
this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund) Account No. ____________________
To: ________________________
(Fund)
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN[_] YES[_] NO
- --------------------------------------------------------------------------------
I/We hereby authorize CGFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day[_] Monthly on the 15th day[_] Monthly on both
the 1st and 15th days
Amount of each debit (minimum $50
per Fund) $ ________________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------
EXCELSIOR FUNDS CLIENT SERVICES
AUTOMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK AUTHORIZATION
- --------------------------------------------------------------------------------
-------------------- ----------------------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by CGFSC, acting as my agent for
the purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ________________ --------- X __________________ -----------
Signature Date Signature Date
<PAGE>
- ------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN[_] YES[_] NONOT AVAILABLE FOR IRA'S
- ------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize CGFSC to redeem the necessary number of shares from
my/our Excelsior Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day[_] Quarterly on the 24th day of
January, April, July and October[_] Other ____________________
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make Recipient ________________________________
check payable Street Address ___________________________
to: (To be City, State, Zip Code ____________________
completed only
if redemption
proceeds to be
paid to other
than account
holder of record
or mailed to
address other
than address of
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
- --------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
- --------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until CGFSC
receives written notice of any change or revocation. Any change in these
instructions must be in writing with all signatures guaranteed (if
applicable).
Date ______________________
X X
------------------------------- -----------------------------
Signature Signature
------------------------------- -----------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
------------------------------- -----------------------------
Signature Signature
------------------------------- -----------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
------------------------------- --------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
------------------------------- --------------------------------------
Signature Signature
------------------------------- --------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY........................................................... 2
INVESTMENT OBJECTIVE AND POLICIES......................................... 3
General.................................................................. 3
Quality of Investments................................................... 3
Types of Municipal Obligations........................................... 4
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION.................... 4
Variable and Floating Rate Instruments................................... 4
When-Issued and Forward Transactions and Stand-By Commitments............ 5
Eligible Taxable Obligations............................................. 5
Illiquid Securities...................................................... 7
Portfolio Turnover....................................................... 7
Risk Factors............................................................. 7
INVESTMENT LIMITATIONS.................................................... 8
PRICING OF SHARES......................................................... 9
HOW TO PURCHASE AND REDEEM SHARES......................................... 10
Distributor.............................................................. 10
Purchase of Shares....................................................... 10
Public Offering Price.................................................... 10
Purchase Procedures...................................................... 13
Redemption Procedures.................................................... 14
Redemption by Mail....................................................... 14
General.................................................................. 15
INVESTOR PROGRAMS......................................................... 16
Exchange Privilege....................................................... 16
Systematic Withdrawal Plan............................................... 18
Automatic Investment Program............................................. 18
DIVIDENDS AND DISTRIBUTIONS............................................... 19
TAXES..................................................................... 19
Federal.................................................................. 19
California............................................................... 20
Miscellaneous............................................................ 21
MANAGEMENT OF THE FUND.................................................... 21
Investment Adviser and Sub-Adviser....................................... 21
Administrators........................................................... 22
Service Organizations.................................................... 22
Banking Laws............................................................. 22
DESCRIPTION OF CAPITAL STOCK.............................................. 23
CUSTODIAN AND TRANSFER AGENT.............................................. 23
EXPENSES.................................................................. 24
PERFORMANCE AND YIELD INFORMATION......................................... 24
MISCELLANEOUS............................................................. 25
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION.................................. 26
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR THE FUND'S STATEMENT OF ADDITIONAL
INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS DIS-
TRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
USTCAXP1096
LOGO
CALIFORNIA TAX-EXEMPT INCOME FUND
Prospectus October 1, 1996
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
California Tax-Exempt Income Fund
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1996
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the California Tax-Exempt Income
Fund (the "Fund"), an investment portfolio of Excelsior Tax-Exempt Funds, Inc.
("Excelsior Tax-Exempt Fund") dated October 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>
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The investment objective of the Fund is to provide California
investors with as high a level of current interest income exempt from Federal
income tax and, to the extent possible, from California state 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 California 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 to its purchase by the Fund, an issue of Municipal Obligations
-1-
<PAGE>
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") and United
States Trust Company of California, the Fund's sub-adviser (the "Sub-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.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Obligations. For example, under the Tax Reform Act of
1986, as amended, interest on certain private activity bonds must be included in
an investor's alternative minimum taxable income, and corporate investors must
treat all tax-exempt interest as an item of tax preference. 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 Obligations, or
-2-
<PAGE>
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. The Fund, its
Investment Adviser and its Sub-Adviser will not 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 liquid assets 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 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.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of the Fund
-4-
<PAGE>
starting on the day the Fund agrees to purchase the securities. The Fund does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held by it. Under a "stand-by commitment," a dealer or bank agrees
to purchase from the Fund, at the Fund's option, specified Municipal Obligations
at a specified price. The amount payable to the Fund upon its exercise of a
"stand-by commitment" is normally (i) the Fund's acquisition cost of the
Municipal Obligations (excluding any accrued interest which the Fund paid on
their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. "Stand-by commitments" are
exercisable by the Fund at any time before the maturity of the underlying
Municipal Obligations, and may be sold, transferred or assigned by the Fund only
with the underlying instruments.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for securities which are acquired
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities). Where the Fund has paid any consideration
directly or indirectly for a "stand-by commitment," its cost will be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
The Fund intends to enter into "stand-by commitments" only with banks
and broker/dealers which, in the Investment Adviser's or Sub-Adviser's opinion,
present minimal credit risks. In evaluating the creditworthiness of the issuer
of a "stand-by commitment," the Investment Adviser or Sub-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.
-5-
<PAGE>
However, there can be no assurance that a liquid secondary market will exist for
any particular futures contract at any specific time. Thus, it may not be
possible to close a futures position. In the event of adverse price movements,
the Fund would continue to be required to make daily cash payments to maintain
its required margin. In such situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily margin requirements at a
time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge.
Successful use of futures by the Fund is also subject to the
Investment Adviser's or Sub-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 California Municipal Obligations
- ---------------------------------------------------------
Some of the significant financial considerations relating to the
Fund's investment in California 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 California
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.
The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information available as
of the date of this Prospectus from official statements and prospectuses
relating to securities offerings of the State of California and various local
agencies in California.
ECONOMIC FACTORS
- ----------------
-7-
<PAGE>
FISCAL YEARS PRIOR TO 1996-97. By the close of the 1989-90 Fiscal
Year, California's revenues had fallen below projections so that the State's
budget reserve, the Special Fund for Economic Uncertainties (the "Special
Fund"), was fully depleted by June 30, 1990. A recession which had begun in
mid-1990, combined with higher health and welfare costs driven by the State's
rapid population growth, adversely affected General Fund revenues and raised
expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted a period
of budget imbalance. Beginning with the 1990-91 Fiscal Year and for several
years thereafter, the budget required multibillion dollar actions to bring
projected revenues and expenditures into balance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the Special Fund --approaching
$2.8 billion at its peak on June 30, 1993.
By the 1993-94 Fiscal Year, the accumulated deficit was too large to
be prudently retired in one year and a two-year program was implemented. This
program used revenue anticipation warrants to carry a portion of the deficit
over to the end of the fiscal year.
The 1994-95 Budget Act projected General Fund revenues and transfers
of $41.9 billion. Expenditures were projected to be $40.9 billion -- an
increase of $1.6 billion over the prior year. As a result of the improving
economy, however, the fiscal year ultimately produced revenues and transfers of
$42.7 billion which more than offset expenditures of $42.0 billion and thereby
reduced the accumulated budget deficit.
With strengthening revenues and reduced caseload growth driven by an
improving economy, the State entered the 1995-96 Fiscal Year budget negotiations
with the smallest nominal "budget gap" to be closed in many years. The 1995-96
Budget Act projected General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year, and expenditures were budgeted at $43.4
billion. In addition, the Department of Finance projected that after repaying
the last of the carryover budget deficit, there would be a positive balance of
$28 million in the budget reserve as of June 30, 1996.
1996-97 FISCAL YEAR. Reflecting the belief shared by many analysts
that the California economy would remain strong, the 1996-1997 Budget Act
established a State budget of some $63 billion. Relying on the optimistic
revenue projections released by the Department of Finance, the Budget Act
granted a $230 million tax cut to corporations while simultaneously providing an
increase in funding for education and prisons. However, only a relatively
modest amount, $287 million, was allocated to the
-8-
<PAGE>
reserve fund available for emergencies such as earthquakes. The ultimate impact
of these and other budgetary allocations is impossible to predict. Indeed,
constant fluctuations in other factors affecting the State -- including changes
in welfare caseloads, property tax receipts and federal funding -- will
undoubtedly create new budget challenges.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring
led to the sale of substantially all of the Pool's portfolio and resulted in
losses estimated to be approximately $1.7 billion (or approximately 22% of
amounts deposited by the Pool investors). Approximately 187 California public
entities -- substantially all of which are public agencies within the county --
had various bonds, notes or other forms of indebtedness outstanding. In some
instances the proceeds of such indebtedness were invested in the Pool.
In April, 1996, the County emerged from bankruptcy after closing on a
$900 million recovery bond deal. At that time, the County and its financial
advisors stated that the County had emerged from the bankruptcy without any
structural fiscal problems and assured that the County would not slip back into
bankruptcy. However, for many of the cities, schools and special districts that
lost money in the County portfolio, repayment remains contingent on the outcome
of litigation which is pending against investment firms and other finance
professionals. Thus, it is impossible to determine the ultimate impact of the
bankruptcy and its aftermath on these various agencies and their claims.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS.
- ---------------------------------------------
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain Municipal Obligations held by the Fund
may be obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's general fund will be distributed in the future to counties, cities and
their various entities is unclear.
-9-
<PAGE>
HEALTH CARE LEGISLATION. Certain Municipal Obligations held by the
Fund may be obligations which are payable solely from the revenues of health
care institutions. Certain provisions under California law may adversely affect
these revenues and, consequently, payment on those Municipal Obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting
is made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient
-10-
<PAGE>
base or gross revenues. Conversely, participation may maintain or increase the
patient base, but may result in reduced payment and lower net income to the
contracting hospitals.
These Municipal Obligations may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured Municipal Obligations, the State Treasurer
will issue debentures payable out of a reserve fund established under the
insurance program or will pay principal and interest on an unaccelerated basis
from unappropriated State funds. At the request of the Office of Statewide
Health Planning and Development, Arthur D. Little, Inc. prepared a study in
December 1983, to evaluate the adequacy of the reserve fund established under
the insurance program and based on certain formulations and assumptions found
the reserve fund substantially underfunded. In September of 1986, Arthur D.
Little, Inc. prepared an update of the study and recommended that an additional
10% reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update recommended maintaining the current reserve calculation
method. In March of 1990, Arthur D. Little, Inc. prepared a further review of
the study and recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that would be
required by an insurance company.
MORTGAGES AND DEEDS. Certain Municipal Obligations held by the Fund
may be obligations which are secured in whole or in part by a mortgage or deed
of trust on real property. California has five principal statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of trust.
Two statutes limit the creditor's right to obtain a deficiency judgment, one
limitation being based on the method of foreclosure and the other on the type of
debt secured. Under the former, a deficiency judgment is barred when the
foreclosure is accomplished by means of a nonjudicial trustee's sale. Under the
latter, a deficiency judgment is barred when the foreclosed mortgage or deed of
trust secures certain purchase money obligations. Another California statute,
commonly known as the "one form of action" rule, requires creditors secured by
real property to exhaust their real property security by foreclosure before
bringing a personal action against the debtor. The fourth statutory provision
limits any deficiency judgment obtained by a creditor secured by real property
following a judicial sale of such property to the excess of the outstanding debt
over the fair value of the property at the time of the sale, thus preventing the
creditor from obtaining a large deficiency judgment against the debtor as the
result of low bids at a judicial sale. The fifth statutory provision gives the
debtor the right to redeem the real property from any judicial foreclosure sale
as to which a deficiency judgment may be ordered against the debtor.
-11-
<PAGE>
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such defaults occur with respect to a substantial number of
mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement
of the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the private-
right-of-sale proceedings violate the due process requirements of the Federal or
State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain Municipal Obligations held by the Fund may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family owner-
occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in
-12-
<PAGE>
excess of 20% of the original principal amount of the loan. This limitation
could affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
PROPOSITION 13. Certain Municipal Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA was to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem
tax on real property to 1% of full cash value to be collected by the counties
and apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition.
Section 2 of Article XIIIA defines "full cash value" to mean "the County
Assessor's valuation of real property as shown on the 1975/76 tax bill under
'full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not levy
any ad valorem property tax except to pay debt service on indebtedness approved
by the voters prior to July 1, 1978, and that each county will levy the maximum
tax permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or authorized as of January 1, 1979, or bonded
indebtedness subsequently approved by the voters. In
-13-
<PAGE>
general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population, and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising tax
rates or fee schedules over the subsequent two years.
PROPOSITION 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both
houses, with the Governor's concurrence -- to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues
for several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, California Teachers'
--------------------
Association v. Gould, which challenged the validity of these off-budget loans.
- --------------------
-14-
<PAGE>
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school funding will not be in jeopardy over repayment of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California Legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July 1,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative provided the
following:
1. Requires that any tax for general governmental purposes imposed by
local governments be approved by resolution or ordinance adopted by a two-
thirds vote of the governmental entity's legislative body and by a majority
vote of the electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for other
than general governmental purposes) imposed by a local governmental entity
be approved by a two-thirds vote of the voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the purposes
or for the service for which the special tax was imposed;
-15-
<PAGE>
4. Prohibits the imposition of ad valorem taxes on real property by
local governmental entities except as permitted by Article XIIIA;
5. Prohibits the imposition of transaction taxes and sales taxes on
the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or after
August 1, 1985 be ratified by a majority vote of the electorate within two
years of the adoption of the initiative;
7. Requires that, in the event a local government fails to comply
with the provisions of this measure, a reduction in the amount of property
tax revenue allocated to such local government occurs in an amount equal to
the revenues received by such entity attributable to the tax levied in
violation of the initiative; and
8. Permits these provisions to be amended exclusively by the voters
of the State of California.
In September 1988, the California Court of Appeal in City of
-------
Westminster v. County of Orange, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511
- -------------------------------
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d
-------------------------
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
-------------------
City of Woodlake decisions.
- ----------------
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28,
------------------------------------------------------
1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th 344e,
----- ------ --------
the California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
- ----------------
correctness of the City of Westminster decision, because that case appeared
-------------------
distinguishable, was not relied on by the parties in Guardino, and involved
--------
taxes not likely to still be at issue. It is impossible to predict the impact
of the
-16-
<PAGE>
Supreme Court's decision on charter cities or on taxes imposed in reliance on
the City of Woodlake case.
----------------
Senate Bill 1590 (O'Connell), introduced February 16, 1996, would make
the Guardino decision inapplicable to any tax first imposed or increased by an
--------
ordinance or resolution adopted before December 14, 1995. The California State
Senate passed the Bill on May 16, 1996 and it is currently pending in the
California State Assembly. It is not clear whether the Bill, if enacted, would
be constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
The voters will be presented with a new initiative constitutional
amendment on the November 1996 ballot. The Right to Vote on Taxes Act,
sponsored by the Howard Jarvis Taxpayers Association, seeks to strengthen
Proposition 62 by requiring majority voter approval for general taxes, two-
thirds voter approval for special taxes (including taxes imposed for specific
purposes but placed in the general fund), voter approval of existing local taxes
enacted after January 1, 1995, and placing other restrictions on fees and
assessments. As a constitutional amendment, the provisions would clearly apply
to charter cities.
Another initiative on the November 1996 ballot, a statutory initiative
sponsored by the California Tax Reform Association, would reimpose the now
sunseted temporary 10 and 11 percent tax brackets and use the revenues from the
increase to replace a portion of the property tax revenue shifted from cities,
counties and special districts to schools on an ongoing basis since 1992.
PROPOSITION 87. On November 8, 1988, California voters approved
Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989.
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).
-17-
<PAGE>
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.
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
-18-
<PAGE>
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 October 1, 1996, is as follows:
California Tax-Exempt
Income Fund
---------------------
Net Assets.................. $ 7.00
Outstanding Shares.......... 1
Net Asset Value Per Share... $ 7.00
Sales Charge (4.50% of the
offering price)............. $ 0.33
Offering to Public.......... $ 7.33
As stated in the Prospectus, the sales load described above will not
be applicable to: (a) purchases of Shares by customers of the Investment
Adviser or its affiliates; (b) trust, agency or custodial accounts opened
through the trust department of a bank, trust company or thrift institution,
provided that appropriate notification of such status is given at the time of
investment; (c) companies, corporations and partnerships (excluding full service
broker/dealers and financial planners, registered investment advisers and
depository institutions not covered by the exemptions in (d) and (e) below); (d)
financial planners and registered investment advisers not affiliated with or
clearing purchases through full service broker/dealers; (e) purchases of Shares
by depository institutions for their own account as principal; (f) exchange
transactions (described below under "Investor Programs -- Exchange Privilege")
where the Shares being exchanged were acquired in connection with the
distribution of assets held in trust, agency or custodial accounts maintained
with the trust department of a bank; (g) corporate/business
-19-
<PAGE>
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 or 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.
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.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market price of
the Fund's portfolio securities.
Excelsior Tax-Exempt Fund reserves the right to honor any request for
redemption or repurchase of the Fund's Shares by
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<PAGE>
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.
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
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<PAGE>
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 or for Trust Shares of Excelsior
Institutional Trust (collectively, the "Companies"). Shares may be exchanged by
wire, telephone or mail and must be made to accounts of identical registration.
There is no exchange fee imposed by the Companies. In order to prevent abuse of
this privilege to the disadvantage of other shareholders, the Companies reserve
the right to limit the number of exchange requests of Investors and Customers of
Shareholder Organizations to no more than six per year. The Companies may
modify or terminate the exchange program at any time upon 60 days' written
notice to shareholders, and may reject any exchange request.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load applicable to the new
shares (by virtue of the Companies' exchange privilege), the amount equal to
such reduction may not be included in the tax basis of the shareholder's
exchanged Shares but may be included (subject to the limitation) in the tax
basis of the new shares.
Other Investor Programs
- -----------------------
As described in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program.
-22-
<PAGE>
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-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,
-23-
<PAGE>
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 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:
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<PAGE>
Position with Principal Occupation
Excelsior Tax- During Past 5 Years and
Name and Address Exempt Fund Other Affiliations
- --------------------------- -------------- -----------------------------------
Alfred C. Tannachion/*/ Chairman of Retired; Chairman of the Board,
1135 Hyde Park Court the Board, President and Treasurer of
Mahwah, NJ 07430 President and Excelsior Funds, Inc. (since 1985);
Age 70 Treasurer 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
333 East 69th Street Funds, Inc. (since 1984); Director
Apt. 10-H of UST Master Variable Series, Inc.
New York, NY 10021 (since 1994); Trustee of Excelsior
Age 70 Institutional Trust (since 1995);
Director, Royal Life Insurance Co.
of NY (since 1991).
Joseph H. Dugan Director Retired; Director of Excelsior
913 Franklin Lake Road Funds, Inc. (since 1984); Director
Franklin Lakes, NJ 07417 of UST Master Variable Series, Inc.
Age 71 (since 1994); Trustee of Excelsior
Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior
2320 Cumberland Road Funds, Inc. (since 1986); Director
Charlottesville, VA 22901 of UST Master Variable Series, inc
Age 75 (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 1988).
Robert A. Robinson Director Director of Excelsior Funds, Inc.
Church Pension Fund (since 1987); Director of UST
800 Second Avenue Master Variable Series, Inc. (since
New York, NY 10017 1994); Trustee of Excelsior
Age 70 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; Director, Morehouse
Publishing Co. (since 1974);
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982);
Director, Infinity Mutual Funds,
Inc. (since 1995).
- -------------------------
/*/ This director is considered to be an "interested person" of Excelsior Fund
as defined in the 1940 Act.
-25-
<PAGE>
Position with Principal Occupation
Excelsior Tax- During Past 5 Years and
Name and Address Exempt Fund Other Affiliations
- --------------------------- -------------- ----------------------------------
Frederick S. Wonham/*/ Director Retired; Director of Excelsior
238 June Road Funds, Inc. (since 1995); Trustee
Stamford, CT 06903 of Excelsior Funds and Excelsior
Age 65 Institutional Trust (since
1995); Vice Chairman of U.S. Trust
Corporation and U.S. Trust Company
of New York (until 1995);
Chairman, U.S. Trust of
Connecticut.
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
1345 Chestnut Street Biddle & Reath.
Philadelphia, PA 19107-3496
Age 53
Sherry Aramini Assistant Second Vice President, Blue Sky
Chase Global Funds Secretary Compliance Manager, Chase Global
Services Company Funds Services Company (since May
73 Tremont Street 1996); Technical Resources Manager,
Boston, MA 02108-3913 Chase Global Funds Services Company
Age 32 (from April 1995 to May 1996);
Financial Reporting Supervisor,
Chase Global Funds Services Company
(from September 1993 to April
1995); Audit Supervisor, Coopers &
Lybrand L.L.P. (from July 1990 to
August 1993).
John M. Corcoran Assistant Vice President, Director
Chase Global Funds Treasurer Administration, Client
Services Company Group, Chase Global
73 Tremont Street Funds Services Company
Boston, MA 02108-3913 (since July 1996);
Age 30 Second Vice President,
Manager of Administration,
Chase Global Funds Services
Company (from October
1993 to July 1996);
Audit Manager, Ernst &
Young LLP (from August
1987 to September 1993).
Each director of Excelsior Tax-Exempt Fund receives an annual fee of
$9,000 plus a meeting fee of $1,500 for each meeting attended and is reimbursed
for expenses incurred in attending meetings. The Chairman of the Board is
entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to 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. The
directors and officers of Excelsior Tax-Exempt Fund as a group own less than 1%
of the Shares of the Fund.
The following chart provides certain information about the fees
received by Excelsior Tax-Exempt Fund's directors in the most recently completed
fiscal year.
Pension or
Retirement Total
Benefits Compensation from
- ------------------------
/*/ This director is considered to be an "interested person" of Excelsior Fund
as defined in the 1940 Act.
-26-
<PAGE>
<TABLE>
<CAPTION>
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>
Alfred C. Tannachion $21,500 None (4)**$51,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $16,500 None (4)**$39,500
Director
Joseph H. Dugan $16,500 None (4)**$39,500
Director
Wolfe J. Frankl $16,500 None (4)**$39,500
Director
Robert A. Robinson
Director $16,500 None (4)**$39,500
Frederick S. Wonham
Director*** $ 6,375 None (4)**$14,424
- ---------------------------
</TABLE>
* The "Fund Complex" consists of Excelsior Funds, Inc., Excelsior Tax-Exempt
Funds, Inc., UST Master Variable Series, Inc., Excelsior Institutional
Trust and Excelsior Funds.
** Number of investment companies in the Fund Complex for which director
serves as director or trustee.
*** Mr. Wonham was elected to the Board of Directors of Excelsior Tax-Exempt
Funds, Inc. on November 17, 1995.
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<PAGE>
Investment Advisory, Sub-Advisory and Administration Agreements
- ---------------------------------------------------------------
United States Trust Company of New York and United States Trust
Company of California serve as the Fund's Investment Adviser and Sub-Adviser,
respectively. In the Investment Advisory Agreement, U.S. Trust has agreed to
provide the services described in the Prospectus. The Investment Adviser and
Sub-Adviser have also agreed to pay all expenses incurred by them in connection
with their activities under the agreements other than the cost of securities,
including brokerage commissions, if any, purchased for the Fund.
The Investment Adviser and Sub-Adviser may, from time to time,
voluntarily waive a portion of their respective fees, which waivers may be
terminated at any time.
The Investment Advisory Agreement and the Sub-Advisory Agreement
provide that the Investment Adviser and the Sub-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 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 or Sub-Adviser in the
performance of their duties or from reckless disregard by either of them of
their duties and obligations thereunder.
Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services, an affiliate of the Distributor, and U.S. Trust serve
as the Fund's 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.
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)
-28-
<PAGE>
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 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
-29-
<PAGE>
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.
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 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
-30-
<PAGE>
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 is
entitled to monthly fees for furnishing custodial services according to the
following fee schedule: on the face value of debt securities and the market
value of equity securities, a fee at the annual rate of .05%; on issues held,
$50.00 for each physical issue held, $25.00 for each book-entry issue held and
1/4 of 1% of market value for each foreign issue held; on transactions, $25.00
for each physical transaction, $15.00 for each book-entry transaction and $50.00
for each foreign security transaction. In addition, Chase is entitled to
reimbursement for its out-of-pocket expenses in connection with the above
services. 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, 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.
-31-
<PAGE>
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.
Securities purchased and sold by the Fund are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
With respect to over-the-counter transactions, the Fund, where possible, will
deal directly with dealers who make a market in the securities involved, except
in those situations where better prices and execution are available elsewhere.
The Investment Advisory and Sub-Advisory Agreements 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 and Sub-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 and Sub-Adviosry Agreement
authorizes the Investment Adviser and Sub-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
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<PAGE>
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 or Sub-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
the Sub-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
and the Sub-Adviser in carrying out its obligations to the Fund.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Sub-Adviser the Distributor, or any affiliated person of
any 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 and the Sub-Adviser. Such other investment
companies and funds may also invest in the same securities as the Fund. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Fund and another investment company or common trust fund, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the Investment Adviser or Sub-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 and the Sub-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.
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<PAGE>
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Excelsior Tax-Exempt Fund.
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 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.
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<PAGE>
"Substantial user" is defined under the Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S Corporation and its shareholders.
In order for the Fund to pay exempt-interest dividends for any taxable
year, at least 50% of the aggregate value of the Fund's portfolio must consist
of exempt-interest obligations at the close of each quarter of its taxable year.
Within 60 days after the close of the taxable year, the Fund will notify its
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by the Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code received
by the Fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as exempt-
interest dividends will be the same for all shareholders receiving dividends
from the Fund for such year.
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.
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<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 Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or 31% of gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure properly to include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so either that they are not subject to backup
withholding or that they are "exempt recipients."
Taxation of Certain Financial Instruments
- -----------------------------------------
Generally, futures contracts held by the Fund at the close of the
Fund's taxable year will be treated for Federal income tax purposes as sold for
their fair market value on the
last business day of such year, a process known as "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. With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by the Fund,
losses as to such contracts to sell will be subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they have
not been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, the Fund may make an election which
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<PAGE>
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% of any net gain
may be treated as long-term and no more than 40% of any net loss may be treated
as short-term. Options on futures contracts generally receive Federal tax
treatment similar to that described above.
The Fund will not be treated as a regulated investment company under
the Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "Short-Short Gain 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
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<PAGE>
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 Short-Short Gain Test is met.
* * *
The foregoing discussion is based on Federal and California state 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
other local taxes.
CALIFORNIA
- ----------
As a regulated investment company, the Fund will be relieved of
liability for California state franchise and corporate income tax to the extent
its earnings are distributed to its shareholders. The Fund will be taxed on its
undistributed taxable income. If for any year the Fund does not qualify for the
special tax treatment afforded regulated investment companies, all of the Fund's
taxable income (including interest income on California Municipal Obligations
for franchise tax purposes only) may be subject to California state franchise or
income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company, or series
thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then a regulated investment company, or series thereof, will be
qualified to pay dividends exempt from California state personal income tax to
its non-corporate shareholders (hereinafter referred to as "California exempt-
interest dividends"). For this purpose, California Exempt Obligations are
generally limited to California Municipal Securities and certain U.S. Government
and U.S. Possession obligations. "Series" of a regulated investment company is
defined as a segregated portfolio of assets, the beneficial interest in which is
owned by the holders of an exclusive class or series of stock of the company.
The Fund intends to qualify under the above requirements so that it can pay
California exempt-interest dividends. If the Fund fails to so qualify, no part
of its dividends to shareholders will be exempt from the California state
personal income tax. The Fund may reject purchase orders for shares if it
appears desirable to avoid failing to so qualify.
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<PAGE>
Within 60 days after the close of its taxable year, the Fund will
notify each shareholder of the portion of the dividends paid by the Fund to the
shareholder with respect to such taxable year which is exempt from California
state personal income tax. The total amount of California exempt-interest
dividends paid by the Fund with respect to any taxable year cannot exceed the
excess of the amount of interest received by the Fund for such year on
California Exempt Securities over any amounts that, if the Fund were treated as
an individual, would be considered expenses related to tax-exempt income or
amortizable bond premium and would thus not be deductible under federal income
or California state personal income tax law. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as California
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or "related
persons" with respect to California Exempt Securities held by the Fund, such
shareholders should consult their tax advisers to determine whether California
exempt-interest dividends paid by the Fund with respect to such obligations
retain California state personal income tax exclusion. In this connection rules
similar to those regarding the possible unavailability of federal exempt-
interest dividend treatment to "substantial users" are applicable for California
state tax purposes. See "Additional Information Concerning Taxes -Federal"
above.
To the extent, if any, dividends paid to shareholders are derived from
the excess of net long-term capital gains over net short-term capital losses,
such dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gains dividends for federal income tax
purposes. See "Additional Information Concerning Taxes -Federal" above.
Moreover, interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for California state personal income tax
purposes if the Fund distributes California exempt-interest dividends during the
shareholder's taxable year.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the Fund and its
shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the Fund or its shareholders,
and this discussion is not intended as a substitute for careful planning.
Further, it should be noted that the portion of any Fund dividends constituting
California exempt-interest dividends is excludable from income for California
state personal income tax purposes only. Any dividends paid to shareholders
subject to
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<PAGE>
California state franchise tax or California state corporate income tax may
therefore be taxed as ordinary dividends to such purchasers notwithstanding that
all or a portion of such dividends is exempt from California state personal
income tax. Accordingly, potential investors in the Fund, including, in
particular, corporate investors which may be subject to either California
franchise tax or California corporate income tax, should consult their tax
advisers with respect to the application of such taxes to the receipt of Fund
dividends and as to their own California state tax situation, in general.
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)To the 6th power - 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
-40-
<PAGE>
interest gained on tax-exempt obligations issued without original issue discount
and having a current market discount by using the coupon rate of interest
instead of the yield to maturity. In the case of tax-exempt obligations with
original issue discount, where the discount based on the current market value
exceeds the then-remaining portion of original issue discount, the yield to
maturity is the imputed rate based on the original issue discount calculation.
Conversely, where the discount based on the current market value is less than
the remaining portion of the original issue discount, the yield to maturity is
based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Fund to all shareholder accounts and to the
particular series of Shares in proportion to the length of the base period and
the Fund's mean (or median) account size. Undeclared earned income will be
subtracted from the maximum offering price per Share (variable "d" in the
formula). The Fund's maximum offering price per Share for purposes of the
formula will include the maximum sales load imposed by the Fund -- currently
4.50% of the per share offering price.
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%.
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 to the to 1th/to the nth power
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.
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<PAGE>
n = period covered by the computation, expressed in years.
The calculation is made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
Share existing on the reinvestment date (reflecting any sales load charged upon
such reinvestment), (2) all recurring fees charged to all shareholder accounts
are included, and (3) for any account fees that vary with the size of the
account, a mean (or median) account size in the Fund during the periods is
reflected. The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment after
deduction of all nonrecurring charges at the end of the measuring period. In
addition, the Fund's average annual total return and aggregate total return
quotations will reflect the deduction of the maximum sales load charged in
connection with the purchase of Shares.
The Fund 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
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<PAGE>
performance of the Fund. Advertisements, sales literature or reports to
shareholders may from time to time also include a discussion and analysis of the
Fund's performance, including without limitation, those factors, strategies and
technologies that together with market conditions and events, materially
affected the Fund's performance.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciations of the Fund would increase the value, not only
of 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
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<PAGE>
Fund. In determining the net asset value of the Fund's Shares, assets belonging
to the Fund allocable to Shares are charged with the direct liabilities of the
Fund allocable to Shares and with a share of the general liabilities of
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.
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APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
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
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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
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year or less which are 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.
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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.
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"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 that 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
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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.
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The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated "DD"
is a defaulted debt obligation, and the rating "DP" represents preferred stock
with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
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"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 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
other categories.
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"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.
"D" - This designation indicates that the long-term debt is in
default.
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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 commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
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"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.
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