<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1998
Registration Nos. 2-93068; 811-4101
_____________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Excelsior Tax-Exempt Funds, Inc: Post-Effective Amendment No. 25 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Excelsior Tax-Exempt Funds, Inc.: Amendment No. 27 [X]
(Exact Name of Registrant as Specified in Charter)
73 Tremont Street
Boston, Massachusetts 02108-3913
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 446-1012
W. Bruce McConnel, III
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this post-effective amendment will become effective
(check appropriate box)
[X] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
----------------------------------
Title of Securities Being Registered.....................Shares of Common Stock
<PAGE>
CROSS-REFERENCE SHEET
---------------------
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
(Money, Government Money, Tax-Exempt Money
Treasury Money and New York
Tax-Exempt Money Funds)
Form N-1A, Part A, Item Prospectus Caption
- ----------------------- ------------------
1. Cover Page Cover Page
2. Synopsis Prospectus Summary; Expense
Summary
3. Condensed Financial Information Financial Highlights;
Performance and Yield
Information
4. General Description of Registrant Prospectus Summary; Investment
Objectives and Policies; Portfolio
Instruments and Other Investment
Information; Investment
Limitations
5. Management of the Fund Management of the Funds; Custodian
and Transfer Agent; Expenses
5A. Management's Discussion of Fund
Performance Not Applicable
6. Capital Stock and
Other Securities How to Purchase and Redeem
Shares; Dividends and
Distributions; Taxes; Description
of Capital Stock; Miscellaneous
7. Purchase of Securities
Being Offered Pricing of Shares; How to
Purchase and Redeem Shares;
Investor Programs
8. Redemption or Repurchase How to Purchase and Redeem Shares
9. Pending Legal Proceedings Not Applicable
<PAGE>
LOGO
Funds, Inc.
Tax-Exempt Funds, Inc.
Excelsior Money Market Funds
- -------------------------------------------------------------------------------
73 Tremont Street
For initial purchase information, current prices,
yield and performance information and existing
account information, call (800) 446-1012. (From
overseas, call (617) 557-8280.)
Boston, Massachusetts 02108-3913
- -------------------------------------------------------------------------------
This Prospectus describes the Money Fund, Government Fund and Treasury Money
Fund, three separate diversified portfolios offered to investors by Excelsior
Funds, Inc. ("Excelsior Fund"), the Tax-Exempt Money Fund, a diversified port-
folio offered by Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt
Fund"), and the New York Tax-Exempt Money Fund, a non-diversified portfolio
offered by Excelsior Tax-Exempt Fund. Excelsior Fund and Excelsior Tax-Exempt
Fund (collectively, the "Companies") are open-end, management investment com-
panies. Each portfolio (individually, a "Fund" and collectively, the "Funds")
has its own investment objective and policies as follows:
MONEY FUND'S investment objective is to seek as high a level of current in-
come as is consistent with liquidity and stability of principal. The Fund will
generally invest in money market instruments, including bank obligations, com-
mercial paper and U.S. Government obligations.
GOVERNMENT MONEY FUND'S investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund will generally invest in short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations.
TREASURY MONEY FUND'S investment objective is to seek current income with
liquidity and stability of principal. The Fund invests primarily in direct
short-term obligations of the U.S. Treasury and certain agencies or instrumen-
talities of the U.S. Government with a view toward providing interest income
that is generally considered exempt from state and local income taxes. Under
normal market conditions, at least 65% of the Fund's total assets will be in-
vested in direct U.S. Treasury obligations. The Fund will not enter into re-
purchase agreements.
TAX-EXEMPT MONEY FUND'S investment objective is to seek a moderate level of
current interest income exempt from Federal income taxes consistent with sta-
bility of principal. The Tax-Exempt Money Fund will invest substantially all
of its assets in high-quality short-term Municipal Securities (as defined be-
low).
NEW YORK TAX-EXEMPT MONEY FUND'S investment objective is to seek a moderate
level of current interest income that is exempt from Federal income tax and,
to the extent possible, from New York State and New York City personal income
taxes, as is consistent with liquidity and stability of principal. The Fund
will invest primarily in New York Municipal Securities (as defined below),
which generally have remaining maturities of 13 months or less and which meet
certain ratings criteria and present minimal credit risks. The Fund may invest
a significant percentage of its assets in a single issuer. Therefore, invest-
ment in the Fund may be riskier than an investment in other types of money
market funds.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1998 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to the address shown above or by calling (800) 446-1012. The
Statement of Additional Information, as it may be supplemented from time to
time, is incorporated by reference in its entirety into this Prospectus. The
Securities and Exchange Commission maintains a World Wide Web site
(http://www.sec.gov) that contains the Statement of Additional Information and
other information regarding the Companies.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT. THE FUNDS SEEK TO MAINTAIN THEIR NET ASSET VALUE PER SHARE AT $1.00
FOR PURPOSES OF PURCHASES AND REDEMPTIONS, ALTHOUGH THERE CAN BE NO ASSURANCE
THAT THEY WILL DO SO ON A CONTINUOUS BASIS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1998
<PAGE>
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York and U.S. Trust Company of
Connecticut (collectively, the "Investment Adviser" or "U.S. Trust").
SHARES IN THE FUNDS ("SHARES") ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, U.S. TRUST, ITS PARENT OR AFFILIATES AND THE SHARES ARE
NOT FEDERALLY INSURED BY, GUARANTEED BY OR OBLIGATIONS OF OR OTHERWISE SUP-
PORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
2
<PAGE>
PROSPECTUS SUMMARY
EXCELSIOR FUNDS, INC. AND EXCELSIOR TAX-EXEMPT FUNDS, INC. are investment
companies offering various investment portfolios with differing objectives and
policies. Founded in 1984, the Companies currently offer 25 Funds with com-
bined assets of approximately $6.1 billion. See "Description of Capital
Stock."
INVESTMENT ADVISER: United States Trust Company of New York and U.S. Trust
Company of Connecticut (collectively, "U.S. Trust" or the "Investment Advis-
er") serve as the Funds' investment adviser. U.S. Trust offers a variety of
specialized financial and fiduciary services to high-net worth individuals,
institutions and corporations. The Companies offer investors access to U.S.
Trust's services. See "Management of the Funds--Investment Adviser."
INVESTMENT OBJECTIVES AND POLICIES: Generally, the Money, Government Money
and Treasury Money Funds are money market funds which seek current income with
liquidity and stability of principal. The Tax-Exempt Money Fund is a money
market fund which seeks current income that is exempt from Federal income
taxes consistent with stability of principal. The New York Tax-Exempt Money
Fund is a money market fund which seeks current income that is exempt from
Federal income tax and, to the extent possible, from New York State and New
York City personal income taxes, as is consistent with liquidity and stability
of principal. The Funds' investment objectives and policies are summarized on
the cover and explained in greater detail later in this Prospectus. See "In-
vestment Objectives and Policies," "Portfolio Instruments and Other Investment
Information" and "Investment Limitations."
HOW TO INVEST: The Funds' Shares are offered at their net asset value. The
Companies do not impose a sales load on purchases of Shares. See "How to Pur-
chase and Redeem Shares."
The minimum to start an account is $500 per Fund, with a minimum of $50 per
Fund for subsequent investments. The easiest way to invest is to complete the
account application which accompanies this Prospectus and to send it with a
check to the address noted on the application. Investors may also invest by
wire and through investment dealers or institutional investors with appropri-
ate sales agreements with the Companies. See "How to Purchase and Redeem
Shares."
HOW TO REDEEM: Redemptions may be requested directly from the Companies by
mail, wire or telephone. Investors investing through another institution
should request redemptions through their Shareholder Organization. See "How to
Purchase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Since the Funds are money market
funds, they seek to maintain their net asset value per share at $1.00 for pur-
poses of purchases and redemptions. However, there can be no assurance that
they will do so on a continuous basis. In addition, the New York Tax-Exempt
Money Fund may invest a significant percentage of its assets in a single issu-
er. Therefore, investment in the Fund may be riskier than an investment in
other types of money market funds. Investment in the Funds should not be con-
sidered a complete investment program. See "Investment Objectives and Poli-
cies" and "Portfolio Instruments and Other Investment Information."
3
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
TREASURY NEW YORK
MONEY GOVERNMENT MONEY TAX-EXEMPT TAX-EXEMPT
FUND MONEY FUND FUND MONEY FUND MONEY FUND
----- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Load.......... None None None None None
Sales Load on Reinvested
Dividends.................... None None None None None
Deferred Sales Load........... None None None None None
Redemption Fees............... None None None None None
Exchange Fees................. None None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory Fees (after fee
waivers)/1/.................. 0.21% 0.22% 0.28% 0.19% 0.34%
12b-1 Fees.................... None None None None None
Other Operating Expenses
Administrative Servicing
Fee/1/..................... 0.04% 0.03% 0.02% 0.06% 0.01%
Other Expenses.............. 0.23% 0.22% 0.22% 0.22% 0.25%
----- ----- ----- ----- -----
Total Operating Expenses
(after fee waivers)/1/....... 0.48% 0.47% 0.52% 0.47% 0.60%
===== ===== ===== ===== =====
</TABLE>
- --------
1. 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
intend to voluntarily waive fees in an amount equal to the Administrative
Servicing Fee, and to further waive fees and reimburse expenses to the ex-
tent necessary for Shares of the New York Tax-Exempt Money Fund to maintain
an annual expense ratio of not more than 0.60%. Without such fee waivers,
"Advisory Fees" would be 0.25%, 0.25%, 0.30%, 0.25% and 0.50%; and "Total
Operating Expenses" would be 0.52%, 0.50%, 0.54%, 0.53% and 0.76% for the
Money, Government Money, Treasury Money, Tax-Exempt Money and New York Tax-
Exempt Money Funds, respectively.
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption of your investment at the end of the
following periods.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Fund...................................... $ 5 $15 $27 $60
Government Money Fund........................... 5 15 26 59
Treasury Money Fund............................. 5 17 29 65
Tax-Exempt Money Fund........................... 5 15 26 59
New York Tax-Exempt Money Fund.................. 6 19 33 75
</TABLE>
The foregoing expense summary and example are intended to assist the in-
vestor in understanding the costs and expenses that an investor in Shares of
the Funds will bear directly or indirectly. The expense summary sets forth ad-
visory and other expenses payable with respect to Shares of the Money, Govern-
ment Money, Treasury Money and Tax-Exempt Money Funds for the fiscal year
ended March 31, 1998, and the estimated advisory and other expenses payable
with respect to Shares of the New York Tax-Exempt Money Fund for the current
fiscal year. For more complete descriptions of the Funds' operating expenses,
see "Management of the Funds" in this Prospectus and the financial statements
and notes incorporated by reference in the Statement of Additional Informa-
tion.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Share outstanding throughout
each period and other performance information derived from the financial state-
ments included in Excelsior Fund's and Excelsior Tax-Exempt Fund's Annual Re-
ports to Shareholders for the fiscal year ended March 31, 1998 (the "Financial
Statements"). The information contained in the Financial Highlights for each
period has been audited by Ernst & Young LLP, Excelsior Fund's and Excelsior
Tax-Exempt Fund's independent auditors. The following tables should be read in
conjunction with the Financial Statements and notes thereto. More information
about the performance of the Money, Government Money, Treasury Money and Tax-
Exempt Money Funds is also contained in the Annual Reports to Shareholders,
which may be obtained from Excelsior Fund and Excelsior Tax-Exempt Fund without
charge by calling the number on the front cover of this Prospectus.
MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income From
Investment
Operations
Net Investment
Income.......... 0.05139 0.04888 0.05336 0.04494 0.02780 0.03234 0.05165 0.07589 0.08454 0.07698
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)..... 0.00000 0.00000 0.00000 0.00002 0.00000 0.00000 0.00017 0.00001 0.00000 0.00000
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total From
Investment
Operations....... 0.05139 0.04888 0.05336 0.04496 0.02780 0.03234 0.05182 0.07590 0.08454 0.07698
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
Dividends From
Net Investment
Income.......... (0.05139) (0.04888) (0.05336) (0.04496) (0.02780) (0.03234) (0.05165) (0.07589) (0.08454) (0.07698)
Distributions
From Net
Realized Gain on
Investments..... 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 (0.00019) 0.00000 0.00000 0.00000
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
Distributions.... (0.05139) (0.04888) (0.05336) (0.04496) (0.02780) (0.03234) (0.05184) (0.07589) (0.08454) (0.07698)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return...... 5.26% 5.00% 5.47% 4.59% 2.82% 3.25% 5.19% 7.64% 8.71% 7.76%
Ratios/Supplemental
Data
Net Assets, End
of Period (in
millions)....... $ 658.87 $ 498.07 $ 394.29 $ 824.58 $ 736.08 $ 784.02 $ 574.27 $ 471.32 $ 432.37 $ 369.69
Ratio of Net
Operating
Expenses to
Average Net
Assets.......... 0.48% 0.47% 0.50% 0.49% 0.51% 0.51% 0.51% 0.52% 0.55% 0.56%
Ratio of Gross
Operating
Expenses to
Average Net
Assets/1/....... 0.52% 0.53% 0.53% 0.52% 0.51% 0.51% 0.51% 0.52% 0.55% 0.56%
Ratio of Net
Income to
Average Net
Assets.......... 5.14% 4.89% 5.40% 4.49% 2.78% 3.21% 5.11% 7.56% 8.42% 7.71%
</TABLE>
- --------
NOTES:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
5
<PAGE>
GOVERNMENT MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Income From
Investment
Operations
Net Investment
Income.......... 0.05082 0.04862 0.05296 0.04397 0.02736 0.03205 0.05069 0.07379 0.08379 0.07498
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)..... 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00002 0.00008 0.00000 0.00000
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Total From
Investment
Operations....... 0.05082 0.04862 0.05296 0.04397 0.02736 0.03205 0.05071 0.07387 0.08379 0.07498
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Less Distributions
Dividends From
Net Investment
Income.......... (0.05082) (0.04862) (0.05296) (0.04397) (0.02736) (0.03205) (0.05069) (0.07379) (0.08379) (0.07498)
Distributions
From Net
Realized Gain on
Investments..... 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 (0.00005) (0.00005) (0.00001) 0.00000
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Total
Distributions.... (0.05082) (0.04862) (0.05296) (0.04397) (0.02736) (0.03205) (0.05074) (0.07384) (0.08380) (0.07498)
-------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Net Asset Value,
End of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========= ======== ======== ======== ======== ========
Total Return...... 5.20% 4.97% 5.43% 4.49% 2.77% 3.20% 5.09% 7.31% 8.30% 7.49%
Ratios/Supplemental
Data
Net Assets, End
of Period (in
millions)....... $ 600.12 $ 533.83 $ 461.47 $ 725.77 $1,034.91 $ 710.49 $ 740.69 $ 700.22 $ 392.02 $ 241.13
Ratio of Net
Operating
Expenses to
Average Net
Assets.......... 0.47% 0.47% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.57% 0.57%
Ratio of Gross
Operating
Expenses to
Average Net
Assets/1/....... 0.50% 0.51% 0.53% 0.53% 0.50% 0.50% 0.50% 0.50% 0.57% 0.57%
Ratio of Net
Income to
Average Net
Assets.......... 5.09% 4.86% 5.36% 4.38% 2.74% 3.20% 5.09% 7.31% 8.30% 7.49%
</TABLE>
- --------
NOTES:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
6
<PAGE>
TAX-EXEMPT MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------- --------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- -------- -------- -------- -------- -------- -------- -------- --------
Income From
Investment
Operations
Net Investment
Income.......... 0.03216 0.03050 0.03362 0.02825 0.01938 0.02395 0.03849 0.05292 0.05808 0.05348
Net Gains or
(Losses) on
Securities (both
realized and
unrealized)..... 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 (0.00001) 0.00000 0.00000
--------- --------- -------- -------- -------- -------- -------- -------- -------- --------
Total From
Investment
Operations....... 0.03216 0.03050 0.03362 0.02825 0.01938 0.02395 0.03849 0.05291 0.05808 0.05348
--------- --------- -------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
Dividends From
Net Investment
Income.......... (0.03216) (0.03050) (0.03362) (0.02825) (0.01938) (0.02395) (0.03849) (0.05292) (0.05808) (0.05348)
Distributions
From Net
Realized Gain on
Investments..... 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- -------- -------- -------- -------- -------- -------- -------- --------
Total
Distributions.... (0.03216) (0.03050) (0.03362) (0.02825) (0.01938) (0.02395) (0.03849) (0.05292) (0.05808) (0.05348)
--------- --------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End of Year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ======== ======== ======== ======== ======== ======== ======== ========
Total Return...... 3.26% 3.09% 3.41% 2.86% 1.96% 2.42% 3.92% 5.42% 5.97% 5.48%
Ratios/Supplemental
Data
Net Assets, End
of Period (in
millions)....... $1,396.53 $1,069.69 $ 966.71 $ 814.89 $ 694.58 $ 659.33 $ 666.35 $ 662.34 $ 600.06 $ 525.30
Ratio of Net
Operating
Expenses to
Average Net
Assets.......... 0.47% 0.47% 0.49% 0.49% 0.52% 0.52% 0.52% 0.53% 0.55% 0.53%
Ratio of Gross
Operating
Expenses to
Average Net
Assets/1/....... 0.53% 0.52% 0.53% 0.52% 0.52% 0.52% 0.52% 0.53% 0.55% 0.53%
Ratio of Net
Income to
Average Net
Assets.......... 3.21% 3.05% 3.35% 2.85% 1.94% 2.39% 3.84% 5.28% 5.79% 5.33%
</TABLE>
- --------
NOTES:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
7
<PAGE>
TREASURY MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991/1/
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income.. 0.04853 0.04676 0.05043 0.04165 0.02590 0.02987 0.04731 0.00782
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00036 0.00001
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations............. 0.04853 0.04676 0.05043 0.04165 0.02590 0.02987 0.04767 0.00783
-------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
Dividends From Net
Investment Income..... (0.04853) (0.04676) (0.05043) (0.04165) (0.02590) (0.02987) (0.04731) (0.00782)
Dividends in Excess of
Net Investment Income. 0.00000/4/ 0.00000/4/ 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000
Distributions From Net
Realized Gain on
Investments........... 0.00000 0.00000 0.00000 0.00000 0.00000 (0.00030) (0.00011) 0.00000
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions..... (0.04853) (0.04676) (0.05043) (0.04165) (0.02590) (0.03017) (0.04742) (0.00782)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ========
Total Return............ 4.96% 4.78% 5.16% 4.25% 2.62% 3.06% 4.85% 0.78%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $ 469.64 $ 349.09 $ 258.17 $ 196.93 $ 254.68 $ 227.79 $ 172.29 $ 110.37
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.52% 0.52% 0.55% 0.55% 0.58% 0.58% 0.52% 0.09%/2/
Ratio of Gross
Operating Expenses to
Average Net Assets/3/. 0.54% 0.54% 0.57% 0.57% 0.58% 0.58% 0.57% 0.60%/2/
Ratio of Net Income to
Average Net Assets.... 4.86% 4.68% 5.03% 4.09% 2.59% 2.97% 4.60% 5.98%/2/
</TABLE>
- --------
NOTES:
1. Inception date of the Fund was February 13, 1991.
2. Annualized.
3. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
4.Amount represents less than $0.01 per share.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser uses its best efforts to achieve the investment ob-
jective of each Fund, although its achievement cannot be assured. The invest-
ment objective of each of the Money, Government Money, Treasury Money and Tax-
Exempt Money Funds is "fundamental," meaning that it may not be changed with-
out a vote of the holders of a majority of the particular Fund's outstanding
Shares (as defined under "Miscellaneous"). The investment objective of the New
York Tax-Exempt Money Fund may be changed by Excelsior Tax-Exempt Fund's Board
of Directors without shareholder approval. Except as noted below in "Invest-
ment Limitations," the investment policies of each Fund may be changed without
a vote of the holders of a majority of the outstanding Shares of such Fund.
Each Fund uses the amortized cost method to value securities in its portfo-
lio and has a dollar-weighted average portfolio maturity not exceeding 90
days. Each Fund is required to comply with Rule 2a-7 under the Investment Com-
pany Act of 1940, as amended (the "1940 Act"), because each Fund uses the am-
ortized cost method to value its securities. Under Rule 2a-7, with respect to
100% of each of the Money, Government Money, Treasury Money and Tax-Exempt
Money Funds' total assets, and 75% of the New York Tax-Exempt Money Fund's to-
tal assets, a Fund may not invest more than 5% of its assets, measured at the
time of purchase, in the securities of any one issuer other than U.S. Govern-
ment securities, repurchase agreements collateralized by such securities and
securities subject to certain guarantees. The New York Tax-Exempt Money Fund's
compliance with the diversification provisions of Rule 2a-7 is deemed to be
compliance with the diversification standards of the 1940 Act.
MONEY FUND
The Money Fund's investment objective is to seek as high a level of current
income as is consistent with liquidity and stability of principal. The Fund
will generally invest in money market instruments, such as bank certificates
of deposit, bankers' acceptances, commercial paper (including variable and
floating rate instruments) and corporate bonds with remaining maturities of 13
months or less, as well as obligations issued or guaranteed by the U.S. Gov-
ernment, its agencies or instrumentalities and repurchase agreements collater-
alized by such obligations. Additional information about the Fund's policies
and portfolio instruments is set forth below under "Portfolio Instruments and
Other Investment Information."
GOVERNMENT MONEY FUND
The Government Money Fund's investment objective is to seek as high a level
of current income as is consistent with liquidity and stability of principal.
The Fund will invest in obligations with remaining maturities of 13 months or
less issued or guaranteed by the U.S. Government, its agencies or instrumen-
talities and repurchase agreements collateralized by such obligations. See
"Portfolio Instruments and Other Investment Information" for information on
other portfolio instruments in which the Fund may invest.
TREASURY MONEY FUND
The Treasury Money Fund's investment objective is to seek current income
with liquidity and stability of principal. The Fund invests primarily in di-
rect obligations of the U.S. Treasury with remaining maturities of 13 months
or less, such as Treasury bills and notes. Under normal market conditions, the
Fund will invest at least 65% of its total assets in direct U.S. Treasury ob-
ligations. The Fund may also from time to time invest in obligations with re-
maining maturities of 13 months or less issued or guaranteed as to principal
and interest by certain agencies or instrumentalities of the U.S. Government,
such as the Farm Credit System Financial Assistance Corporation, Federal Fi-
nancing Bank, General Services Administration, Federal Home Loan Banks, Farm
Credit System and the Tennessee Valley Authority. Income on direct investments
in U.S. Treasury securities and obligations of the aforementioned agen -
9
<PAGE>
cies and instrumentalities is generally not subject to state and local income
taxes by reason of Federal law. In addition, the Fund's dividends from income
that is attributable to such investments will also be exempt in most states
from state and local income taxes. Shareholders in a particular state should
determine through consultation with their own tax advisors whether and to what
extent dividends payable by the Treasury Money Fund from its investments will
be considered by the state to have retained exempt status, and whether the
Fund's capital gain and other income, if any, when distributed will be subject
to the state's income tax. See "Taxes--State and Local." The Treasury Money
Fund will not enter into repurchase agreements.
TAX-EXEMPT MONEY FUND
The Tax-Exempt Money Fund's investment objective is to seek a moderate level
of current interest income exempt from Federal income taxes consistent with
stability of principal. The Fund will invest substantially all of its assets in
high-quality debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political subdivisions, the inter-
est on which is, in the opinion of bond counsel to the issuer, exempt from Fed-
eral income tax ("Municipal Securities"). Portfolio securities in the Fund will
generally have remaining maturities of not more than 13 months. (See "Portfolio
Instruments and Other Investment Information.")
The Tax-Exempt Money Fund is designed for investors in relatively high tax
brackets who are seeking a moderate amount of tax-free income with stability of
principal and less price volatility than would normally be associated with in-
termediate-term and long-term Municipal Securities.
The Tax-Exempt Money Fund invests in Municipal Securities which are deter-
mined by the Investment Adviser to present minimal credit risks. As a matter of
fundamental policy, except during temporary defensive periods, the Fund will
maintain at least 80% of its assets in tax-exempt obligations. (This policy may
not be changed with respect to the Fund without the vote of the holders of a
majority of its outstanding Shares.)
NEW YORK TAX-EXEMPT MONEY FUND
The New York Tax-Exempt Money Fund is a non-diversified investment portfolio
whose investment objective is to seek a moderate level of current interest in-
come that is exempt from Federal income tax and, to the extent possible, from
New York State and New York City personal income taxes, as is consistent with
liquidity and stability of principal.
Under normal market conditions, at least 80% of the Fund's net assets will be
invested in Municipal Securities which are determined by the Investment Adviser
to present minimal credit risks. The Fund may also invest in tax-exempt deriva-
tive securities such as tender option bonds, participations, beneficial inter-
ests in trusts and partnership interests. Dividends paid by the Fund that are
derived from interest on obligations that is exempt from taxation under the
Constitution or statutes of New York ("New York Municipal Securities") are ex-
empt from regular Federal, New York State and New York City personal income
tax. New York Municipal Securities include municipal securities issued by the
State of New York and its political sub-divisions, as well as certain other
governmental issuers such as the Commonwealth of Puerto Rico. Dividends derived
from interest on Municipal Securities other than New York Municipal Securities
are exempt from Federal income tax but may be subject to New York State and New
York City personal income tax (see "Taxes" below). The Fund expects that under
normal market conditions, at least 65% of its total assets will be invested in
New York Municipal Securities. Portfolio securities held by the Fund generally
will have remaining maturities of not more than 13 months.
The Fund is concentrated in securities issued by New York State or entities
within New York State and therefore investment in the Fund may be riskier than
an investment in other types of money market
10
<PAGE>
funds. The Fund's ability to achieve its investment objective is dependent
upon the ability of the issuers of New York Municipal Securities to meet their
continuing obligations for the payment of principal and interest. New York
State and New York City face long-term economic problems that could seriously
affect their ability and that of other issuers of New York Municipal Securi-
ties to meet their financial obligations.
Certain substantial issuers of New York Municipal Securities (including is-
suers whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times jeop-
ardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by
Standard & Poor's Ratings Services ("S&P") and Moody's Investors Service, Inc.
("Moody's"), the most recent actions of S&P and Moody's have been to place the
debt obligations of New York State on CreditWatch with positive implications
and to upgrade the debt obligations of New York City, respectively. Strong de-
mand for New York Municipal Securities has also at times had the effect of
permitting New York Municipal Securities to be issued with yields relatively
lower, and after issuance, to trade in the market at prices relatively higher,
than comparably rated municipal obligations issued by other jurisdictions. A
recurrence of the financial difficulties previously experienced by certain is-
suers of New York Municipal Securities could result in defaults or declines in
the market values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal Securities. Although as of
the date of this Prospectus, no issuers of New York Municipal Securities are
in default with respect to the payment of their municipal obligations, the oc-
currence of any such default could affect adversely the market values and mar-
ketability of all New York Municipal Securities and, consequently, the net as-
set value of the Fund's portfolio.
Other considerations affecting the Fund's investments in New York Municipal
Securities are summarized in the Statement of Additional Information.
From time to time, a substantial portion of the Fund's assets may be in-
vested in Municipal Securities supported by credit and liquidity enhancements
from banks or other financial institutions. Therefore, changes in the credit
quality of these institutions could cause losses to the Fund and affect its
share price.
INVESTMENT POLICIES COMMON TO THE TAX-EXEMPT MONEY AND NEW YORK TAX-EXEMPT
MONEY FUNDS
From time to time on a temporary defensive basis due to market conditions,
the Tax-Exempt Money and New York Tax-Exempt Money Funds (collectively, the
"Tax-Exempt Funds") may hold uninvested cash reserves or invest in taxable ob-
ligations in such proportions as, in the opinion of the Investment Adviser,
prevailing market or economic conditions may warrant. Uninvested cash reserves
will not earn income. Taxable obligations in which the Tax-Exempt Funds may
invest include: (i) obligations of the U.S. Treasury; (ii) obligations of
agencies and instrumentalities of the U.S. Government; (iii) money market in-
struments such as certificates of deposit, commercial paper, and bankers' ac-
ceptances; (iv) repurchase agreements collateralized by U.S. Government obli-
gations or other money market instruments; and (v) securities issued by other
investment companies that invest in high-quality, short-term securities. (See
"Portfolio Instruments and Other Investment Information.")
The Tax-Exempt Funds may also invest from time to time in "private activity
bonds" (see "Types of Municipal Securities" below), the interest on which is
treated as a specific tax preference item under the Federal alternative mini-
mum tax. Investments in such securities, however, will not exceed under normal
market conditions 20% of a Fund's net assets when added together with any tax-
able investments by the Fund.
11
<PAGE>
Each Tax-Exempt Fund may invest more than 25% of its assets in Municipal Se-
curities the interest on which is paid solely from revenues on similar projects
if such investment is deemed necessary or appropriate by the Investment Advis-
er. To the extent that a Fund's assets are concentrated in Municipal Securities
payable from revenues on similar projects, the Fund will be subject to the pe-
culiar risks presented by such projects to a greater extent than it would be if
its assets were not so concentrated.
Opinions relating to the validity of Municipal Securities and to the exemp-
tion of interest thereon from Federal income tax (and, with respect to New York
Municipal Securities, to the exemption of interest thereon from New York State
and New York City personal income taxes) are rendered by bond counsel to the
respective issuers at the time of issuance, and opinions relating to the valid-
ity of and the tax-exempt status of payments received by the New York Tax-Ex-
empt Money Fund from tax-exempt derivatives are rendered by counsel to the re-
spective sponsors of such derivatives. The Funds and the Investment Adviser
will rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Securities, the creation of
any tax-exempt derivative securities, or the bases for such opinions.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
GOVERNMENT OBLIGATIONS
Government obligations acquired by the Funds include obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. Such in-
vestments may include obligations issued by the Farm Credit System Financial
Assistance Corporation, the Federal Financing Bank, the General Services Admin-
istration, Federal Home Loan Banks and the Tennessee Valley Authority. Obliga-
tions of certain agencies and instrumentalities of the U.S. Government are sup-
ported by the full faith and credit of the U.S. Treasury; others are supported
by the right of the issuer to borrow from the Treasury; others are supported by
the discretionary authority of the U.S. Government to purchase the agency's ob-
ligations; still others are supported only by the credit of the instrumentali-
ty. No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated
to do so by law. Obligations of such instrumentalities will be purchased only
when the Investment Adviser believes that the credit risk with respect to the
instrumentality is minimal.
Securities issued or guaranteed by the U.S. Government have historically in-
volved little risk of loss of principal if held to maturity. However, due to
fluctuations in interest rates, the market value of such securities may vary
during the period a shareholder owns Shares of a Fund.
As stated above, the Treasury Money Fund will purchase primarily direct obli-
gations of the U.S. Treasury and obligations of those agencies or instrumental-
ities of the U.S. Government interest income from which is generally not sub-
ject to state and local income taxes.
MONEY MARKET INSTRUMENTS
"Money market instruments" that may be purchased by the Money, Government
Money, Tax-Exempt Money and New York Tax-Exempt Money Funds in accordance with
their investment objectives and policies stated above include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates of de-
posit, and non-negotiable time deposits earning a specified return and issued
by a U.S. bank which is a member of the Federal Reserve System or insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"),
or by a savings and loan association or savings bank which is insured by the
Savings Association Insurance Fund of the FDIC. Bank obligations acquired by
the Money Fund may also include U.S. dollar-denominated obligations of foreign
branches of U.S. banks and obligations of domestic
12
<PAGE>
branches of foreign banks. Investments in bank obligations are limited to the
obligations of financial institutions having more than $2 billion in total as-
sets at the time of purchase. Investments in bank obligations of foreign
branches of domestic financial institutions or of domestic branches of foreign
banks are limited so that no more than 5% of the value of the Fund's total as-
sets may be invested in any one branch, and that no more than 20% of the
Fund's total assets at the time of purchase may be invested in the aggregate
in such obligations. Investments in non-negotiable time deposits are limited
to no more than 5% of the value of a Fund's total assets at time of purchase,
and are further subject to the overall 10% limit on illiquid securities de-
scribed below under "Illiquid Securities."
Investments in obligations of foreign branches of U.S. banks and of U.S.
branches of foreign banks may subject the Money Fund to additional investment
risks, including future political and economic developments, the possible im-
position of withholding taxes on interest income, possible seizure or nation-
alization of foreign deposits, the possible establishment of exchange con-
trols, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks
may be subject to less stringent reserve requirements and to different ac-
counting, auditing, reporting, and recordkeeping standards than those applica-
ble to domestic branches of U.S. banks. Investments in the obligations of U.S.
branches of foreign banks or foreign branches of U.S. banks will be made only
when the Investment Adviser believes that the credit risk with respect to the
instrument is minimal.
VARIABLE AND FLOATING RATE INSTRUMENTS
Commercial paper may include variable and floating rate instruments. While
there may be no active secondary market with respect to a particular instru-
ment purchased by a Fund, the Fund may, from time to time as specified in the
instrument, demand payment of the principal of the instrument or may resell
the instrument to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if
the issuer defaulted on its payment obligation or during periods that the Fund
is not entitled to exercise its demand rights, and the Fund could, for this or
other reasons, suffer a loss with respect to such instrument. While the Funds
will in general invest only in securities that mature within 13 months of the
date of purchase, they may invest in variable and floating rate instruments
which have nominal maturities in excess of 13 months if such instruments have
demand features that comply with conditions established by the Securities and
Exchange Commission ("SEC") (see "Additional Information on Portfolio Instru-
ments--Variable and Floating Rate Instruments" in the Statement of Additional
Information).
Some of the instruments purchased by the Government Money and Treasury Money
Funds may also be issued as variable and floating rate instruments. However,
since they are issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, they may have a more active secondary market.
QUALITY OF INVESTMENTS
The Funds may only invest in: (i) securities in the two highest short-term
rating categories of a nationally recognized statistical rating organization
("NRSRO"), provided that if a security is rated by more than one NRSRO, at
least two NRSROs must rate the security in one of the two highest short-term
rating categories; (ii) unrated securities determined to be of comparable
quality at the time of purchase; (iii) certain money market fund shares; and
(iv) U.S. Government securities (collectively, "Eligible Securities"). The
rating symbols of the NRSROs which the Funds may use are described in the Ap-
pendix to the Statement of Additional Information.
REPURCHASE AGREEMENTS
The Money, Government Money, Tax-Exempt Money and New York Tax-Exempt Money
Funds may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually
13
<PAGE>
agreed upon date and price ("repurchase agreements"). A Fund will enter into
repurchase agreements only with financial institutions that are deemed to be
creditworthy by the Investment Adviser, pursuant to guidelines established by
the Boards of Directors. The Funds will not enter into repurchase agreements
with the Investment Adviser or any of its affiliates. Repurchase agreements
with remaining maturities in excess of seven days will be considered illiquid
securities and will be subject to the 10% limit described below under "Illiq-
uid Securities."
The seller under a repurchase agreement will be required to maintain the
value of the securities which are subject to the agreement and held by a Fund
at not less than the repurchase price. Default or bankruptcy of the seller
would, however, expose a Fund to possible delay in connection with the dispo-
sition of the underlying securities or loss to the extent that proceeds from a
sale of the underlying securities were less than the repurchase price under
the agreement. Income on the repurchase agreements will be taxable.
SECURITIES LENDING
To increase return on their portfolio securities, the Money Fund and Govern-
ment Money Fund may lend their portfolio securities to broker/dealers pursuant
to agreements requiring the loans to be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned. Collateral for such loans may include cash, securities of the U.S.
Government, its agencies or instrumentalities, or an irrevocable letter of
credit issued by a bank which meets the investment standards of these Funds,
or any combination thereof. Such loans will not be made if, as a result, the
aggregate of all outstanding loans of a Fund exceeds 30% of the value of its
total assets. There may be risks of delay in receiving additional collateral
or in recovering the securities loaned or even a loss of rights in the collat-
eral should the borrower of the securities fail financially. However, loans
are made only to borrowers deemed by the Investment Adviser to be of good
standing and when, in the Investment Adviser's judgment, the income to be
earned from the loan justifies the attendant risks.
INVESTMENT COMPANY SECURITIES
The Funds may invest in securities issued by other investment companies
which invest in high-quality, short-term securities and which determine their
net asset value per share based on the amortized cost or penny-rounding meth-
od. The Tax-Exempt Funds normally will invest in securities of investment com-
panies only if such companies invest primarily in high-quality, short-term Mu-
nicipal Securities. The Government Money and Treasury Money Funds intend to
limit their acquisition of shares of other investment companies to those com-
panies which are themselves permitted to invest only in securities which may
be acquired by the respective Funds. Securities of other investment companies
will be acquired by a Fund within the limits prescribed by the 1940 Act. Ex-
cept as otherwise permitted under the 1940 Act, each Fund currently intends to
limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 5% of the value of its total assets will
be invested in the securities of any one investment company; (b) not more than
10% of the value of its total assets will be invested in the aggregate in se-
curities of investment companies as a group; and (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Fund. In addition to the advisory fees and other expenses a Fund bears di-
rectly in connection with its own operations, as a shareholder of another in-
vestment company, a Fund would bear its pro rata portion of the other invest-
ment company's advisory fees and other expenses. As such, the Fund's share-
holders would indirectly bear the expenses of the Fund and the other invest-
ment company, some or all of which would be duplicative. Any change by the
Funds in the future with respect to their policies concerning investments in
securities issued by other investment companies will be made only in accor-
dance with the requirements of the 1940 Act.
14
<PAGE>
TYPES OF MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be held
by the Tax-Exempt Funds are "general obligation" securities and "revenue" se-
curities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and in-
terest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the pro-
ceeds of a special excise tax or other specific revenue source such as user
fees of the facility being financed. Private activity obligations are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity revenue obli-
gations is usually directly related to the credit standing of the corporate
user of the facility involved.
Each Tax-Exempt Fund's portfolio may also include "moral obligation" securi-
ties, which are usually issued by public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from cur-
rent revenues, it may draw on a reserve fund--the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality
which created the issuer. There is no limitation on the amount of moral obli-
gation securities that may be held by a Tax-Exempt Fund.
The Tax-Exempt Funds may purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments or both
with respect to specific underlying Municipal Securities. In general, such
"stripped" Municipal Securities are offered at a substantial discount in rela-
tion 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 Security, such yield will be exempt from Federal income
tax for such investor to the same extent as interest on the underlying Munici-
pal Security. The Tax-Exempt Funds intend to purchase custodial receipts and
"stripped" Municipal Securities only when the yield thereon will be, as de-
scribed above, exempt from Federal income tax to the same extent as interest
on the underlying Municipal Securities.
The New York Tax-Exempt Money Fund may also invest in tax-exempt derivative
securities such as tender option bonds, participations, beneficial interests
in trusts and partnership interests. A typical tax-exempt derivative security
involves the purchase of an interest in a Municipal Security or a pool of Mu-
nicipal Securities which interest can include a tender option, demand or other
feature, allowing the Fund to tender the underlying Municipal Security to a
third party at periodic intervals and to receive the principal amount thereof.
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
The Funds may purchase eligible securities on a "when-issued" basis and may
purchase or sell such securities on a "forward commitment" basis. These trans-
actions involve a commitment by a Fund to purchase or sell particular securi-
ties with payment and delivery taking place in the future beyond the normal
settlement date at a stated price and yield. Securities purchased on a "for-
ward commitment" or "when-issued" basis are recorded as an asset and are sub-
ject to changes in value based upon changes in the general level of interest
rates. Absent unusual market conditions, "forward commitments" and "when-is-
sued" purchases will not exceed 25% of the value of a Fund's total assets, and
the length of such commitments will not exceed 45 days. The Funds do not in-
tend to engage in "when-issued" purchases or "forward commitments" for specu-
lative purposes, but only in furtherance of their investment objectives.
In addition, each Tax-Exempt Fund may acquire "stand-by commitments" with
respect to Municipal Securities held by it. Under a "stand-by commitment," a
dealer agrees to purchase at the Fund's option specified Municipal Securities
at a specified price. The Tax-Exempt Funds will acquire "stand-by commitments"
solely to facilitate portfolio liquidity and do not intend to exercise their
rights thereunder for trading purposes. "Stand-by commitments" acquired by a
Tax-Exempt Fund would be valued at zero in determining the Fund's net asset
value. Further information concerning "stand-by commit -
15
<PAGE>
ments" is contained in the Statement of Additional Information under "Addi-
tional Information on Portfolio Instruments."
BORROWING AND REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds, in an amount up to 10% of the value of its total
assets, for temporary or emergency purposes, such as meeting larger than an-
ticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and bro-
ker-dealers and to repurchase them at a mutually agreed date and price (a "re-
verse repurchase agreement"). The SEC views reverse repurchase agreements as a
form of borrowing. At the time a Fund enters into a reverse repurchase agree-
ment, it will place in a segregated custodial account liquid assets having a
value equal to the repurchase price, including accrued interest. Reverse re-
purchase agreements involve the risk that the market value of the securities
sold by a Fund may decline below the repurchase price of those securities.
ILLIQUID SECURITIES
Each Fund will not knowingly invest more than 10% of the value of its net
assets in securities that are illiquid. A security will be considered illiquid
if it may not be disposed of within seven days at approximately the value at
which the particular Fund has valued the security. Each Fund may purchase se-
curities which are not registered under the Securities Act of 1933, as amended
(the "Act"), but which can be sold to "qualified institutional buyers" in ac-
cordance with Rule 144A under the Act. Any such security will not be consid-
ered illiquid so long as it is determined by the Investment 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 ef-
fect of increasing the level of illiquidity in a Fund during any period that
qualified institutional buyers are no longer interested in purchasing these
restricted securities.
YEAR 2000
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be affected adversely if the
computer systems used by the Investment Adviser and the Funds' other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Investment Adviser and the Funds' other service providers have
informed the Companies that they are taking steps to address the Year 2000
Problem with respect to the computer systems that they use. At this time, how-
ever, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Funds as a result of the Year 2000 Problem.
INVESTMENT LIMITATIONS
The investment limitations set forth below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of the holders
of a majority of the Fund's outstanding Shares (as defined under "Miscellane-
ous").
Each of the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds may not:
1. Purchase securities of any one issuer if immediately after such pur-
chase more than 5% of the value of its total assets would be invested in
the securities of such issuer, provided that up to 25% of the value of each
Fund's total assets may be invested without regard to this 5% limitation;
notwithstanding the foregoing restriction, each Fund may invest without re-
gard to the 5% limitation in Government Securities (as defined in the 1940
Act) and as otherwise permitted in accordance with Rule 2a-7 under the 1940
Act or any successor rule; and
16
<PAGE>
2. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time
of such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed and 10% of the value of its total as-
sets at the time of such borrowing. (This borrowing provision is included
solely to facilitate the orderly sale of portfolio securities to accommo-
date abnormally heavy redemption requests and is not for leverage purpos-
es.) A Fund will not purchase portfolio securities while borrowings in ex-
cess of 5% of its total assets are outstanding.
The Treasury Money Fund may not:
3. Purchase securities other than obligations issued or guaranteed by the
U.S. Treasury or an agency or instrumentality of the U.S. Government and
securities issued by investment companies that invest in such obligations.
The New York Tax-Exempt Money Fund may not:
4. Invest less than 80% of its net assets in securities the interest on
which is exempt from Federal income tax, except during defensive periods or
periods of unusual market conditions;
5. Borrow money or mortgage, pledge, or hypothecate its assets except to
the extent permitted under the 1940 Act; and
6. 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 securi-
ties of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the U.S.
Government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentali-
ties or political subdivisions, and repurchase agreements secured by such
securities.
* * *
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value of a
Fund's portfolio securities will not constitute a violation of such limitation.
In Investment Limitation No. 1 above: (a) a security is considered to be is-
sued by the governmental entity or entities whose assets and revenues back the
security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental 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) secu-
rities issued or guaranteed as to principal or interest by the United States,
or by a person controlled or supervised by and acting as an instrumentality of
the Government of the United States, or any certificate of deposit for any of
the foregoing, are deemed to be Government Securities.
The Funds are subject to additional investment limitations which are deemed
matters of their fundamental policies and, as such, may not be changed without
a requisite shareholder vote. For a full description of the Funds' additional
fundamental investment limitations, see the Statement of Additional Informa-
tion.
PRICING OF SHARES
The net asset value of each of the Money, Government Money and Treasury Money
Funds is determined and the Shares of each such Fund are priced for purchases
and redemptions as of 1:00 p.m.
17
<PAGE>
(Eastern Time) and the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), currently 4:00 p.m. (Eastern Time). The net asset
value of each of the Tax-Exempt Money and New York Tax-Exempt Money Funds is
determined and the Shares of each such Fund are priced for purchases and re-
demptions as of 12:00 p.m. (Eastern Time) and the close of regular trading
hours on the Exchange. Net asset value and pricing for each Fund are deter-
mined on each day the Exchange and the Investment Adviser are open for trading
("Business Day"). Currently, the holidays which the Funds observe are New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memo-
rial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiv-
ing 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 belonging to a Fund, less the liabilities charged to the Fund, by
the number of its outstanding Shares. The assets in each Fund are valued by
the Funds' administrators based upon the amortized cost method.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by the Companies'
sponsor and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly
owned subsidiary of Federated Investors, Inc. The Distributor is a registered
broker/dealer. Its principal business address is 5800 Corporate Drive, Pitts-
burgh, PA 15237-5829.
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 make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria estab-
lished by the Distributor, or that participates in sales programs sponsored by
the Distributor. The Distributor in its discretion may also from time to time,
pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily in-
tended to result in sales of Shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
In addition, the Distributor may offer to pay a fee from its own assets to
financial institutions for the continuing investment of customers' assets in
the Funds or for providing substantial marketing, sales and operational sup-
port. The support may include initiating customer accounts, participating in
sales, educational and training seminars, providing sales literature, and en-
gineering computer software programs that emphasize the attributes of the
Funds. Such payments will be predicated upon the amount of Shares the finan-
cial institution sells or may sell, and/or upon the type and nature of sales
or marketing support furnished by the financial institution.
PURCHASE OF SHARES
Shares in each Fund are offered without any purchase or redemption charge
imposed by the Companies. The Distributor has established several procedures
for purchasing Shares in order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by
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 agreements
with the Companies. A Shareholder Organization may elect to hold of record
Shares for its Customers and to record beneficial ownership of Shares on the
account statements provided by it to its Customers. If it does so, it is the
Shareholder Organization's responsibility to transmit to the Distributor all
purchase orders for its Cus-
18
<PAGE>
tomers and to transmit, on a timely basis, payment for such orders to Chase
Global Funds Services Company ("CGFSC"), the Funds' sub-transfer agent, in ac-
cordance with the procedures agreed to by the Shareholder Organization and the
Distributor. Confirmations of all such Customer purchases and redemptions will
be sent by CGFSC to the particular Shareholder Organization. As an alternative,
a Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization contin-
ues to place its Customers' purchase and redemption orders with the Funds,
CGFSC will send confirmations of such transactions and periodic account state-
ments directly to the shareholders of record. Shares in the Funds bear the ex-
pense of fees payable to Shareholder Organizations for such services. See "Man-
agement of the Funds--Shareholder Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An Investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such Investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly from the Distributor in accordance with proce-
dures described below under "Purchase Procedures."
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 any 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, the name of the
Fund and the account number in which the investment is to be made. Institu-
tional Investors may purchase Shares by transmitting their purchase orders to
CGFSC by telephone at (800) 446-1012 or by terminal access. Institutional In-
vestors must pay for Shares with Federal funds or funds immediately available
to 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 Sys-
tem to:
The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account No. 9102732915
For further credit to:
Excelsior Funds
Wire Control Number
Account Registration
(including account number)
19
<PAGE>
Investors making initial investments by wire must promptly complete the Ap-
plication accompanying this Prospectus and forward it to CGFSC. Redemptions by
Investors 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 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for auto-
matic investment and other cash management services provided. The Companies re-
serve the right to reject any purchase order, in whole or in part, or to waive
any minimum investment requirements. Third party checks will not be accepted as
payment for Fund Shares.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem
all or part of their investments in the Funds in accordance with procedures
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 the Companies, although Shareholder Organizations may charge a Cus-
tomer's account for wiring redemption proceeds. Information relating to such
redemption services and charges, if any, is available from the Shareholder Or-
ganizations. An Investor redeeming Shares through a registered investment ad-
viser or certified financial planner may incur transaction charges in connec-
tion with such redemptions. Such Investors should contact their registered in-
vestment adviser or certified financial planner for further information on
transaction fees. Investors may redeem all or part of their Shares in accor-
dance with any of the procedures described below (these procedures also apply
to Customers of Shareholder Organizations for whom individual accounts have
been established with 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 an 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
20
<PAGE>
must participate in the Securities Transfer Agents Medallion Program ("STAMP")
in order to be approved by CGFSC pursuant to the Signature Guarantee Guide-
lines. Copies of the Signature Guarantee Guidelines and information on STAMP
can be obtained from CGFSC at (800) 446-1012 or at the address given above.
CGFSC may require additional supporting documents for redemptions made by cor-
porations, executors, administrators, trustees and guardians. A redemption re-
quest will not be deemed to be properly received until CGFSC receives all re-
quired documents in proper form. Payment for Shares redeemed will ordinarily
be made by mail within five Business Days after receipt by CGFSC of the re-
demption request in good order. Questions with respect to the proper form for
redemption requests should be directed to CGFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing CGFSC
by wire or telephone to wire the redemption proceeds directly to the Direct
Investor's account at any commercial bank in the United States. Direct Invest-
ors 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. Institutional Investors
may also have their Shares redeemed by wire 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. The redemption proceeds for Direct
Investors must be paid to the same bank and account as designated on the Ap-
plication or in written instructions subsequently received by CGFSC.
Investors may request that Shares be redeemed and redemption proceeds wired
on the same day if telephone redemption instructions are received by 1:00 p.m.
(Eastern Time) (12:00 p.m. with respect to the Tax-Exempt Funds) on the day of
redemption. Shares redeemed and wired on the same day will not receive the
dividend declared on the day of redemption. Redemption requests made after
1:00 p.m. (Eastern Time) (12:00 p.m. with respect to the Tax-Exempt Funds)
will receive the dividend declared on the day of redemption, and redemption
proceeds will be wired the following Business Day. To request redemption of
Shares by wire, Direct Investors should call CGFSC at (800) 446-1012 (from
overseas, call (617) 557-8280).
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, a Direct Investor must send a written request to the Companies, c/o
CGFSC, at the address listed above under "Redemption by Mail." Such request
must be signed by the Direct Investor, with signatures guaranteed (see "Re-
demption by Mail" above, for details regarding signature guarantees). Further
documentation may be requested.
CGFSC and the Distributor reserve the right to refuse a wire or telephone
redemption if it is believed advisable to do so. Procedures for redeeming
Shares by wire or telephone may be modified or terminated at any time by the
Companies, CGFSC or the Distributor. THE COMPANIES, CGFSC AND THE DISTRIBUTOR
WILL NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON
TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPT-
ING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE COMPANIES WILL USE
SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE IN-
STRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
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."
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<PAGE>
Redemption by Check
Except as described in "Investor Programs" below, Direct Investors in the
Funds may redeem Shares, without charge, by check drawn on the Direct Invest-
or's particular Fund account. Checks may be made payable to the order of any
person or organization designated by the Direct Investor and must be for
amounts of $500 or more. Direct Investors will continue to earn dividends on
the Shares to be redeemed until the check clears at The Chase Manhattan Bank.
Checks are supplied free of charge, and additional checks are sent to Direct
Investors upon request. Checks will be sent only to the registered owner at
the address of record. Direct Investors who want the option of redeeming
Shares by check must indicate this in the Application for purchase of Shares
and must submit a signature card with signatures guaranteed with such Applica-
tion. The signature card is included in the Application for the purchase of
Shares contained in this Prospectus. In order to arrange for redemption by
check after an account has been opened, a written request must be sent to the
Companies, c/o CGFSC, at the address listed above under "Redemption by Mail"
and must be accompanied by a signature card with signatures guaranteed (see
"Redemption by Mail" above, for details regarding signature guarantees).
Stop payment instructions with respect to checks may be given to the Compa-
nies by calling (800) 446-1012 (from overseas, call (617) 557-8280). If there
are insufficient Shares in the Direct Investor's account with the Fund to
cover the amount of the redemption check, the check will be returned marked
"insufficient funds," and CGFSC will charge a fee of $25.00 to the account.
Checks may not be used to close an account.
If any portion of the Shares to be redeemed represents an investment made by
personal check, the Companies and CGFSC reserve the right not to honor the re-
demption 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 immediate access to
his or her investment should purchase Shares by Federal funds or bank wire or
by certified or cashier's check. Banks normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds. If a Direct Investor's purchase check is not collected, the
purchase will be cancelled and CGFSC will charge a fee of $25.00 to the Direct
Investor's account.
Other Redemption Information
Except as provided in "Investor Programs" below, Investors may be required
to redeem Shares in a Fund upon 60 days' written notice if due to Investor re-
demptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Or-
ganization to maintain a minimum balance in his or her account at the institu-
tion with respect to Shares of a Fund, and the balance in such account falls
below that minimum, the Customer may be obliged by the Shareholder Organiza-
tion to redeem all or part of his or her Shares to the extent necessary to
maintain the required minimum balance.
The Companies may also redeem Shares involuntarily or make payment for re-
demption in securities if it appears appropriate to do so in light of the Com-
panies' responsibilities under the 1940 Act.
EFFECTIVE TIME OF PURCHASES AND REDEMPTIONS
Purchase orders for Shares of the Money, Government Money and Treasury Money
Funds which are received in good order no later than 1:00 p.m. (Eastern Time)
on any Business Day will be effective as of 1:00 p.m. and will receive the
dividend declared on the day of purchase as long as CGFSC receives payment in
Federal funds prior to the close of regular trading hours on the Exchange
(currently 4:00 p.m., Eastern Time). Purchase orders for Shares of such Funds
received in good order after 1:00 p.m. (Eastern Time) and prior to 4:00 p.m.
(Eastern Time), on any Business Day for which payment in Federal funds has
been received by 4:00 p.m. (Eastern Time), will be effective as of 4:00 p.m.,
and will
22
<PAGE>
begin receiving dividends the following day. Purchase orders for Shares of the
Tax-Exempt Money and New York Tax-Exempt Money Funds which are received in
good order no later than 12:00 p.m. (Eastern Time) on any Business Day will be
effective as of 12:00 p.m. and will receive the dividend declared on the day
of purchase as long as CGFSC receives payment in Federal funds prior to the
close of regular trading hours on the Exchange. Purchase orders for Shares of
such Funds received in good order after 12:00 p.m. (Eastern Time) and prior to
4:00 p.m. (Eastern Time), on any Business Day for which payment in Federal
funds has been received by 4:00 p.m. (Eastern Time), will be effective as of
4:00 p.m., and will begin receiving dividends the following day.
Purchase orders for Shares made by Direct Investors are not effective until
the amount to be invested has been converted to Federal funds. In those cases
in which a Direct Investor pays for Shares by check, Federal funds will gener-
ally become available two Business Days after a purchase order is received. In
certain circumstances, the Companies may not require that amounts invested by
Shareholder Organizations on behalf of their Customers or by Institutional In-
vestors be converted into Federal funds. Redemption orders are executed at the
net asset value per Share next determined after receipt of the order.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by the Companies, ex-
change Shares in a Fund having a value of at least $500 for shares of any
other portfolio offered by the Companies, or for Trust Shares of Excelsior In-
stitutional Trust, provided that such other shares may legally be sold in the
state of the Investor's residence.
Excelsior Fund currently offers 15 additional portfolios as follows:
Short-Term Government Securities Fund, a fund seeking a high level of
current income by investing principally in obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and repurchase
agreements collateralized by such obligations, and having a dollar-weighted
average portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of
current 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 primarily
through investments in investment grade debt obligations, U.S. Government
obligations and money market instruments;
Blended Equity Fund, a fund seeking long-term capital appreciation
through investments in a diversified portfolio of primarily equity securi-
ties;
Income and Growth Fund, a fund seeking to provide moderate current income
and to achieve capital appreciation as a secondary objective by investing
in common stock, preferred stock and securities convertible into common
stock;
Energy and Natural Resources Fund, a non-diversified fund seeking long-
term capital appreciation by investing in companies that are in the energy
and other natural resources groups of industries;
Value and Restructuring Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefiting from their restructuring or rede-
ployment of assets and operations in order to become more competitive or
profitable;
Small Cap Fund, a fund seeking long-term capital appreciation by invest-
ing primarily in companies with capitalization of $1 billion or less;
23
<PAGE>
Large Cap Growth Fund, a fund seeking superior, risk-adjusted total re-
turn by investing in larger companies whose growth prospects, in the opin-
ion of its investment adviser, appear to exceed that of the overall market;
Real Estate Fund, a non-diversified fund seeking current income and long-
term capital appreciation by investing in real estate investment trusts and
other companies principally engaged in the real estate business;
International Fund, a fund seeking total return derived primarily from
investments in foreign equity securities;
Latin America Fund, a fund seeking long-term capital appreciation through
investments in companies and securities of governments based in all coun-
tries in Central and South America;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through
investments in companies and securities of governments based in Asia and on
the Asian side of the Pacific Ocean;
Pan European Fund, a fund seeking long-term capital appreciation through
investments in companies and securities of governments based in Europe; and
Emerging Markets Fund, a fund seeking long-term capital appreciation
through investments primarily in equity securities of emerging country is-
suers.
Excelsior Tax-Exempt Fund currently offers 5 additional portfolios as fol-
lows:
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through
investments in municipal obligations and having a dollar-weighted average
portfolio 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 invest-
ments in municipal obligations and having a dollar-weighted average portfo-
lio maturity of 3 to 10 years;
Long-Term Tax-Exempt Fund, a diversified fund attempting to maximize cur-
rent interest income exempt from Federal income taxes through investments
in municipal obligations and having a dollar-weighted average portfolio ma-
turity of 10 to 30 years;
New York Intermediate-Term Tax-Exempt Fund, a non-diversified fund de-
signed 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 munici-
pal obligations and has a dollar-weighted average portfolio maturity of 3
to 10 years; and
California Tax-Exempt Income Fund, a non-diversified fund designed to
provide California investors with as high a level of current interest in-
come exempt from Federal and, to the extent possible, California state per-
sonal income taxes as is consistent with relative stability of principal;
this fund invests primarily in California municipal obligations and has a
dollar-weighted average portfolio maturity of 3 to 10 years.
Excelsior Institutional Trust currently offers Trust Shares in the following
investment portfolios:
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 ex-
ceed that of the overall market; and
Value Equity Fund, a fund seeking long-term capital appreciation through
investments in a diversified portfolio of equity securities whose market
value, in the opinion of its investment adviser, appears to be undervalued
relative to the marketplace.
An exchange involves a redemption of all or a portion of the Shares in a Fund
and the investment of the redemption proceeds in shares of another portfolio of
the Companies or Excelsior Institutional Trust. The redemption will be made at
the per Share net asset value of the Shares being redeemed next
24
<PAGE>
determined after the exchange request is received in good order. The shares of
the portfolio to be acquired will be purchased at the per share net asset value
of those shares next determined after receipt of the exchange request in good
order.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in a Fund. For further
information regarding exchange privileges, shareholders should call (800) 446-
1012 (from overseas, call (617) 557-8280). Investors exercising the exchange
privilege with the other portfolios of the Companies or Excelsior Institutional
Trust should request and review the prospectuses of such funds. Such prospec-
tuses may be obtained by calling the 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 exchange requests of Investors and Customers of
Shareholder Organizations to no more than six per year. The Companies may mod-
ify or terminate the exchange program at any time upon 60 days' written notice
to shareholders, and may reject any exchange request.
Exchanges by Telephone. For shareholders who have previously selected the
telephone exchange option, an exchange order may be placed by calling (800)
446-1012 (from overseas, please call (617) 557-8280). By establishing the tele-
phone exchange option, a shareholder authorizes CGFSC and the Distributor to
act upon telephone instructions believed to be genuine. THE COMPANIES, EXCEL-
SIOR INSTITUTIONAL TRUST, CGFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE FOR THE
AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REASONABLY BE-
LIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE
GENUINE, THE COMPANIES AND EXCELSIOR INSTITUTIONAL TRUST WILL USE SUCH PROCE-
DURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND
REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a Fund with a value of $10,000 or more may es-
tablish a Systematic Withdrawal Plan. The Investor may request a declining-bal-
ance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an Investor must complete Section 9 of the New Ac-
count Application contained in this Prospectus and mail it to CGFSC at the ad-
dress 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 Shareholder Organizations.
RETIREMENT PLANS
Shares are available for purchase by Investors in connection with the follow-
ing tax-deferred prototype retirement plans offered by United States Trust Com-
pany of New York:
IRAs (including "rollovers" from existing retirement plans) for individu-
als and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-em-
ployed individuals and their partners to benefit themselves and their em-
ployees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-Pur-
chase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment
for IRAs is $250 per Fund and the minimum subsequent investment is $50 per
Fund. Detailed information concerning eligibility, service fees and other mat-
ters related to these
25
<PAGE>
plans can be obtained by calling (800) 446-1012 (from overseas, call (617)
557-8280). Customers of Shareholder Organizations may purchase Shares of the
Funds pursuant to retirement plans if such plans are offered by their Share-
holder Organizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (mini-
mum of $50 per Fund per transaction) at regular intervals selected by the In-
vestor. The minimum initial investment for an Automatic Investment Program ac-
count is $50 per Fund. Provided the Investor's financial institution allows
automatic withdrawals, Shares are purchased by transferring funds from an In-
vestor's checking, bank money market or NOW account designated by the Invest-
or. At the Investor's option, the account designated will be debited in the
specified amount, and Shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.
To establish an Automatic Investment account, an Investor must complete Sec-
tion 8 of the New Account 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
Business Days following receipt. The Companies may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently
is contemplated.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Funds is declared daily as a dividend to
the persons who are shareholders of the respective Funds immediately after the
1:00 p.m. (12:00 p.m. with respect to the Tax-Exempt Funds) pricing of Shares
on the day of declaration. All such dividends are paid within ten days after
the end of each month or within seven days after the redemption of all of a
shareholder's Shares of a Fund. For dividend purposes, a Fund's investment in-
come is reduced by accrued expenses directly attributable to that Fund and the
general expenses of the particular Company prorated to that Fund on the basis
of its relative net assets. Net realized capital gains, if any, are distrib-
uted at least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of other Shareholder Organi-
zations will receive dividends and distributions in additional Shares of the
Fund on which the dividend is paid or the distribution is made (as determined
on the payable date), unless they have requested in writing (received by CGFSC
at the Companies' 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
Each of the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds qualified for its last taxable year as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Each Fund
expects to so qualify in future years. Such qualification generally relieves a
Fund of liability for Federal income taxes to the extent its earnings are dis-
tributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that a Fund distribute to its shareholders an amount equal
to at least the sum of 90% of its investment company taxable income and 90% of
its exempt-interest income (if any) net of certain deductions for
26
<PAGE>
each taxable year. In general, a Fund's investment company taxable income will
be its taxable income (including interest) subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. The taxable Funds
intend to distribute substantially all of their investment company taxable in-
come each year. Such dividends will be taxable as ordinary income to Fund
shareholders who are not currently exempt from Federal income taxes, whether
such income is received in cash or reinvested in additional Shares. (Federal
income taxes for distributions to IRAs and qualifying pension plans are de-
ferred under the Code.) Because all of each Fund's net investment income is ex-
pected to be derived from earned interest, it is anticipated that no part of
any distributions will be eligible for the dividends received deduction for
corporations.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
Tax-Exempt Funds. Each Tax-Exempt Fund's policy is to pay dividends each year
equal to at least the sum of 90% of its net exempt-interest income and 90% of
its investment company taxable income, if any. Dividends derived from exempt-
interest income ("exempt-interest dividends") may be treated by a Fund's share-
holders as items of interest excludable from their gross income under Section
103(a) of the Code, unless, under the circumstances applicable to the particu-
lar shareholder, exclusion would be disallowed. (See Statement of Additional
Information under "Additional Information Concerning Taxes.")
If a Tax-Exempt Fund should hold certain "private activity bonds" issued af-
ter August 7, 1986, the portion of dividends paid by the Fund which is attrib-
utable to interest on such bonds must be included in a shareholder's Federal
alternative minimum taxable income, as an item of tax preference, for the pur-
pose of determining liability (if any) for the 26% to 28% alternative minimum
tax for individuals and the 20% alternative minimum tax applicable to corpora-
tions. Corporate shareholders must also take all exempt-interest dividends into
account in determining certain adjustments for Federal alternative minimum tax
purposes. Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the tax-
ability of such benefits.
Dividends payable by a Tax-Exempt Fund which are derived from taxable income
or from long-term or short-term capital gains, if any, will be subject to Fed-
eral income tax, whether such dividends are paid in the form of cash or addi-
tional Shares.
If a shareholder holds Shares of a Tax-Exempt Fund 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.
STATE AND LOCAL
The Treasury Money Fund is structured to provide shareholders, to the extent
permissible by Federal and state law, with income that is exempt or excluded
from taxation at the state and local level. Most states--by statute, judicial
decision or administrative action--have taken the position that dividends of a
regulated investment company such as the Treasury Money Fund that are attribut-
able to interest on obligations of the U.S. Treasury and certain U.S. Govern-
ment agencies and instrumentalities (including those authorized for purchase by
the Fund) are the functional equivalent of interest from such obligations and
are, therefore, exempt from state and local income taxes. As a result, substan-
tially all dividends paid by the Treasury Money Fund to shareholders residing
in those states will be exempt or excluded from state income tax.
27
<PAGE>
Nevertheless in some jurisdictions, exempt-interest dividends and other dis-
tributions paid by the Tax-Exempt Money Fund may be taxable to shareholders
under state or local law as dividend income, even though all or a portion of
such distributions is derived from interest on tax-exempt obligations which,
if realized directly, would be exempt from such income taxes.
NEW YORK
Exempt-interest dividends (as defined for Federal income tax purposes) de-
rived from interest on New York Municipal Securities (as defined above) will
be exempt from New York State and New York City personal income taxes (but not
corporate franchise taxes), provided the interest on such obligations is and
continues to be exempt from applicable Federal, New York State and New York
City income taxes. To the extent that Investors are subject to state and local
taxes outside of New York State and New York City, distributions by the New
York Tax-Exempt Money Fund may be taxable income for purposes thereof. Divi-
dends and distributions derived from income (including capital gains on all
New York Municipal Securities) other than interest on the New York Municipal
Securities described above are not exempt from New York State and New York
City taxes.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry Shares of the New York Tax-Exempt Money Fund generally is not deduct-
ible for Federal, New York State or New York City personal income tax purpos-
es.
MISCELLANEOUS
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situa-
tions. Shareholders will be advised annually as to the Federal, New York State
and New York City personal income tax consequences of distributions made each
year.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of the
Companies' Boards of Directors. The Statement of Additional Information con-
tains the names of and general background information concerning the Compa-
nies' directors.
INVESTMENT ADVISER
United States Trust Company of New York ("U.S. Trust New York") and U.S.
Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively with
U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as the
Investment Adviser to the Funds. U.S. Trust New York is a state-chartered bank
and trust company and a member bank of the Federal Reserve System. U.S. Trust
Connecticut is a Connecticut state bank and trust company. U.S. Trust New York
and U.S. Trust Connecticut are wholly-owned subsidiaries of U.S. Trust Corpo-
ration, a registered bank holding company.
The Investment 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. On De-
cember 31, 1997, the Asset Management Groups of U.S. Trust New York and U.S.
Trust Connecticut had approximately $61.2 billion in aggregate assets under
management. U.S. Trust New York has its principal offices at 114 W. 47th
Street, New York, New York 10036. U.S. Trust Connecticut has its principal of-
fices at 225 High Ridge Road, East Building, Stamford, Connecticut 06905.
28
<PAGE>
The Investment Adviser manages each Fund, makes decisions with respect to
and places orders for all purchases and sales of its portfolio securities, and
maintains records relating to such purchases and sales. For the services pro-
vided and expenses assumed pursuant to its Investment Advisory Agreements, the
Investment Adviser is entitled to a fee, computed daily and paid monthly, at
the annual rate of: 0.25% of the average daily net assets of each of the Mon-
ey, Government Money and Tax-Exempt Money Funds; 0.30% of the Treasury Money
Fund's average daily net assets; and 0.50% of the New York Tax-Exempt Money
Fund's average daily net assets.
Prior to May 16, 1997, U.S. Trust New York served as investment adviser to
the Money, Government Money, Treasury Money and Tax-Exempt Money Funds pursu-
ant to advisory agreements substantially similar to the Investment Advisory
Agreements currently in effect for the Funds. For the fiscal year ended March
31, 1998, U.S. Trust received an advisory fee at the effective annual rates of
0.21%, 0.22%, 0.28% and 0.19% of the average daily net assets of the Money,
Government Money, Treasury Money and Tax-Exempt Money Funds, respectively. For
the same period, U.S. Trust waived advisory fees at the effective annual rates
of 0.04%, 0.03%, 0.02% and 0.06% of the average daily net assets of the Money,
Government Money, Treasury Money and Tax-Exempt Money Funds, respectively.
From time to time, the Investment Adviser may voluntarily waive all or a
portion of the advisory fees payable to it by a Fund, which waiver may be ter-
minated at any time. See "Management of the Funds--Shareholder Organizations"
for additional information on fee waivers.
ADMINISTRATORS
CGFSC, Federated Administrative Services and U.S. Trust Connecticut serve as
the Funds' administrators (the "Administrators") and provide them with general
administrative and operational assistance. The Administrators also serve as
administrators of the other portfolios of the Companies and of all the portfo-
lios of Excelsior Institutional Trust, which are also advised by the Invest-
ment Adviser and its affiliates and distributed by the Distributor. For the
services provided to all portfolios of the Companies and Excelsior Institu-
tional Trust (except the international portfolios of Excelsior Fund and Excel-
sior 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 Companies and Excelsior Institutional Trust (excluding
the international portfolios of Excelsior Fund and Excelsior Institutional
Trust) as follows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY NET
ASSETS OF BOTH COMPANIES AND EXCELSIOR
INSTITUTIONAL TRUST (EXCLUDING THE
INTERNATIONAL PORTFOLIOS OF EXCELSIOR
FUND AND EXCELSIOR INSTITUTIONAL TRUST) ANNUAL FEE
--------------------------------------- ----------
<S> <C>
first $200 million..................... 0.200%
next $200 million...................... 0.175%
over $400 million...................... 0.150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of the
Companies and of Excelsior Institutional Trust are allocated in proportion to
their relative average daily net assets at the time of determination. From
time to time, the Administrators may voluntarily waive all or a portion of the
administration fee payable to them by a Fund, which waivers may be terminated
at any time. See "Management of the Funds--Shareholder Organizations" for ad-
ditional information on fee waivers.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and U.S.
Trust New York served as the Companies' administrators pursuant to administra-
tion agreements substantially similar to the administration agreements cur-
rently in effect for the Companies. For the fiscal year ended March 31, 1998,
CGFSC, Federated Administrative Services and U.S. Trust received an aggregate
administration fee at the effective annual rate of 0.153% of the average daily
net assets of each of the Money, Government Money, Treasury Money and Tax-Ex-
empt Money Funds.
29
<PAGE>
SHAREHOLDER ORGANIZATIONS
As described above under "Purchase of Shares," each Company has agreements
with certain Shareholder Organizations--firms that provide services, which may
include acting as record shareholder, to their Customers who beneficially own
Shares. As a consideration for these services, a Fund will pay the Shareholder
Organization an administrative service fee up to the annual rate of 0.40% of
the average daily net asset value of its Shares held by the Shareholder Orga-
nization's Customers. Such services, which are described more fully in the
Statement of Additional Information under "Management of the Funds--Share-
holder Organizations," may include assisting in processing purchase, exchange
and redemption requests; transmitting and receiving funds in connection with
Customer orders to purchase, exchange or redeem Shares; and providing periodic
statements. It is the responsibility of Shareholder Organizations to advise
Customers of any fees that they may charge in connection with a Customer's in-
vestment. Until further notice, the Investment Adviser and Administrators have
voluntarily agreed to waive fees payable by a Fund in an aggregate amount
equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company reg-
istered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a regis-
tered, open-end investment company continuously engaged in the issuance of its
shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Shares of the Funds, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks gen-
erally 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, CGFSC and certain Shareholder
Organizations may be subject to such banking laws and regulations. State secu-
rities laws may differ from the interpretations of Federal law discussed in
this paragraph and banks and financial institutions may be required to regis-
ter as dealers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would
affect their net asset values per Share or result in financial loss to any
shareholder.
DESCRIPTION OF CAPITAL STOCK
Excelsior Fund was organized as a Maryland corporation on August 2, 1984.
Currently, Excelsior Fund has authorized capital of 35 billion shares of Com-
mon Stock, $0.001 par value per share, classified into 43 series of shares
representing interests in 18 investment portfolios. Excelsior Fund's Charter
authorizes the Board of Directors to classify or reclassify any class of
shares of Excelsior Fund into one or more classes or series. Shares of Class
A, Class B and Class G Common Stock represent interests in the Money, Govern-
ment Money and Treasury Money Funds, respectively.
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, $0.001 par value per share, classified into 7
classes of shares representing 7 investment portfolios currently being of-
fered. Excelsior Tax-Exempt Fund's Charter authorizes the Board of Directors
to classify or reclassify any class of shares of Excelsior Tax-Exempt Fund
into one or more classes or series. Shares of Class A and Class G Common Stock
represent interests in the Tax-Exempt Money and New York Tax-Exempt Money
Funds, respectively.
30
<PAGE>
Each Share represents an equal proportionate interest in the particular Fund
with other shares of the same class, and is entitled to such dividends and
distributions out of the income earned on the assets belonging to such Fund as
are declared in the discretion of the particular Company's Board of Directors.
Shareholders are entitled to one vote for each full share held, and frac-
tional 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
writing to CGFSC and will not be issued for fractional Shares.
As of July 8, 1998, U.S. Trust and its affiliates held of record substan-
tially all of the Companies' outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The Chase
Manhattan Corporation, serves as the custodian of the Funds' assets. Communi-
cations to the custodian should be directed to Chase, Mutual Funds Service Di-
vision, 3 Chase MetroTech Center, 8th Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer and dividend disbursing
agent. U.S. Trust New York has also entered into a sub-transfer agency ar-
rangement with CGFSC, 73 Tremont Street, Boston, Massachusetts 02108-3913,
pursuant to which CGFSC provides certain transfer agent, dividend disbursement
and registrar services to the Funds.
YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the
yields of the Funds may be quoted and compared to those of other mutual funds
with similar investment objectives and to other relevant indexes or to
rankings prepared by independent services or other financial or industry pub-
lications that monitor the performance of mutual funds. For example, the
yields of the Funds may be compared to the applicable averages compiled by
Donoghue's Money Fund Report, a widely recognized independent publication that
monitors the performance of money market funds. The yields of the taxable
Funds may also be compared to the average yields reported by the Bank Rate
Monitor for money market deposit accounts offered by the 50 leading banks and
thrift institutions in the top five standard metropolitan statistical areas.
Yield data as reported in national financial publications including, but not
limited to, Money Magazine, Forbes, Barron's, The Wall Street Journal and The
New York Times, or in publications of a local or regional nature, may also be
used in comparing the Funds' yields.
Each Fund may advertise its Shares' seven-day yield which refers to the in-
come generated over a particular seven-day period identified in the advertise-
ment by an investment in the Fund. This income is annualized, i.e., the income
during a particular week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The Funds may also ad-
vertise the "effective yields" of Shares which are calculated similarly but,
when annualized, income is assumed to be reinvested, thereby making the effec-
tive yields slightly higher because of the compounding effect of the assumed
reinvestment.
31
<PAGE>
In addition, the Tax-Exempt Funds may from time to time advertise the "tax-
equivalent yields" of Shares to demonstrate the level of taxable yield neces-
sary to produce an after-tax yield equivalent to that achieved by a Fund. This
yield is computed by increasing the yields of a Fund's Shares (calculated as
above) by the amount necessary to reflect the payment of Federal (and New York
State and New York City, with respect to the New York Tax-Exempt Money Fund)
income taxes at a stated tax rate.
Yields will fluctuate and any quotation of yield should not be considered as
representative of a Fund's future performance. Since yields fluctuate, yield
data cannot necessarily be used to compare an investment in the Funds with
bank deposits, savings accounts and similar investment alternatives which of-
ten provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that yield is generally a function of the kind
and quality of the instruments held in a portfolio, portfolio maturity, oper-
ating expenses, and market conditions. Any fees charged by Shareholder Organi-
zations with respect to accounts of Customers that have invested in Shares
will not be included in calculations of yield.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds'
independent auditors.
The staff of the SEC has expressed the view that the use of this combined
Prospectus for the Funds may subject the Funds to liability for losses arising
out of any statement or omission regarding a particular Fund.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of a Company or a particular Fund means, with respect to the
approval of an investment advisory agreement or a change in a fundamental in-
vestment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding shares of such Company or such Fund, or (b) 67% or more of the
shares of such Company or such Fund present at a meeting if more than 50% of
the outstanding shares of such Company or such Fund are represented at the
meeting in person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at
the address listed under "Distributor."
32
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
FOR OVERNIGHT DELIVERY: send to:
Complete the Application and mail to:
<TABLE>
<S> <C>
Excelsior Funds Excelsior Funds
c/o Chase Global Funds Services Company c/o Chase Global Funds Services Company
P.O. Box 2798 73 Tremont Street
Boston, MA 02208-2798 Boston, MA 02108-3913
</TABLE>
Please enclose with the Application your check made payable to the "Excel-
sior 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
per Fund; subsequent investments must be in the minimum amount of $50 per
Fund. Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other 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 sub-transfer agent at (800) 446-1012 between 9:00
a.m. and 5:00 p.m. (Eastern Time).
33
<PAGE>
PROSPECTUS AUGUST 1, 1998
LOGO EXCELSIOR
Funds, Inc.
Tax-Exempt Funds, Inc.
MONEY FUND
GOVERNMENT MONEY FUND
TREASURY MONEY FUND
TAX-EXEMPT MONEY FUND
NEW YORK TAX-EXEMPT MONEY FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................................................... 3
EXPENSE SUMMARY....................................................... 4
FINANCIAL HIGHLIGHTS.................................................. 5
INVESTMENT OBJECTIVES AND POLICIES.................................... 9
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION................ 12
INVESTMENT LIMITATIONS................................................ 16
PRICING OF SHARES..................................................... 17
HOW TO PURCHASE AND REDEEM SHARES..................................... 18
INVESTOR PROGRAMS..................................................... 23
DIVIDENDS AND DISTRIBUTIONS........................................... 26
TAXES................................................................. 26
MANAGEMENT OF THE FUNDS............................................... 28
DESCRIPTION OF CAPITAL STOCK.......................................... 30
CUSTODIAN AND TRANSFER AGENT.......................................... 31
YIELD INFORMATION..................................................... 31
MISCELLANEOUS......................................................... 32
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION.............................. 33
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OF-
FERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANIES
OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
COMPANIES OR BY THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
USTMMP898
<PAGE>
EXCELSIOR FUNDS, INC.
Money Fund
Government Money Fund
Treasury Money Fund
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Tax-Exempt Money Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the Money Fund, Government Money
Fund and Treasury Money Fund of Excelsior Funds, Inc. ("Excelsior Fund") and the
Tax-Exempt Money Fund of Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt
Fund") dated August 1, 1998 (the "Prospectus"). Much of the information
contained in this Statement of Additional Information expands upon the subjects
discussed in the Prospectus. No investment in shares of the portfolios
described herein ("Shares") should be made without reading the Prospectus. A
copy of the Prospectus may be obtained by writing Excelsior Funds c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by
calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES...................... 1
Additional Information on Portfolio Instruments.... 1
Additional Investment Limitations.................. 5
NET ASSET VALUE AND NET INCOME.......................... 7
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.......... 8
INVESTOR PROGRAMS....................................... 10
Systematic Withdrawal Plan......................... 10
Exchange Privilege................................. 10
Other Investor Programs............................ 11
DESCRIPTION OF CAPITAL STOCK............................ 11
MANAGEMENT OF THE FUNDS................................. 13
Directors and Officers............................. 13
Investment Advisory and Administration Agreements.. 18
Shareholder Organizations.......................... 20
Expenses........................................... 21
Custodian and Transfer Agent....................... 21
PORTFOLIO TRANSACTIONS.................................. 22
INDEPENDENT AUDITORS.................................... 23
COUNSEL................................................. 23
ADDITIONAL INFORMATION CONCERNING TAXES................. 24
Generally.......................................... 24
Tax-Exempt Money Fund.............................. 24
YIELD INFORMATION....................................... 25
MISCELLANEOUS........................................... 27
FINANCIAL STATEMENTS.................................... 27
APPENDIX A.............................................. A-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
This Statement of Additional Information contains additional
information with respect to the Money Fund, Government Money Fund and Treasury
Money Fund of Excelsior Fund (collectively, the "Taxable Funds") and the Tax-
Exempt Money Fund of Excelsior Tax-Exempt Fund (the portfolios are referred to
individually as a "Fund" and collectively as the "Funds"; Excelsior Fund and
Excelsior Tax-Exempt Fund are referred to individually as a "Company" and
collectively as the "Companies").
The investment objectives and policies of the Funds are described in
the Prospectus. The following information supplements the description of the
investment objectives and policies as set forth in the Prospectus.
Additional Information on Portfolio Instruments
- -----------------------------------------------
Variable and Floating Rate Instruments
--------------------------------------
With respect to variable and floating rate instruments described in
the Prospectus, United States Trust Company of New York ("U.S. Trust New York")
and U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and,
collectively with U.S. Trust New York, the "Investment Adviser" or "U.S. Trust")
will consider the earning power, cash flows and other liquidity ratios of the
issuers of such instruments and will continuously monitor their financial
ability to meet payment on demand. In determining dollar-weighted average
portfolio maturity and whether a variable or floating rate instrument has a
remaining maturity of 13 months or less, the maturity of each instrument will be
computed in accordance with guidelines established by the Securities and
Exchange Commission (the "SEC").
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement). Securities subject to
repurchase agreements are held by the Funds' custodian (or sub-custodian) or in
the Federal Reserve/Treasury Money book-entry system. Repurchase agreements are
considered loans by a Fund under the Investment Company Act of 1940, as amended
(the "1940 Act").
Securities Lending
------------------
When the Money Fund or Government Money Fund lends its portfolio
securities, it continues to receive interest or dividends on the securities lent
and may simultaneously earn interest on the investment of the cash loan
collateral, which will be invested in readily marketable, high-quality, short-
term obligations. Although voting rights, or rights to consent, attendant to
securities lent pass to the borrower, such loans may be called at any time and
will be
<PAGE>
called so that the securities may be voted by a Fund if a material event
affecting the investment is to occur.
When-Issued and Forward Transactions
------------------------------------
When a Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, the Fund's liquidity
and ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Funds incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Tax-Exempt Money Fund may acquire "stand-by commitments" with
respect to Municipal Securities held by it. Under a "stand-by commitment," a
dealer or bank agrees to purchase from the Tax-Exempt Money Fund, at the Fund's
option, specified Municipal Securities at a specified price. The amount payable
to the Fund upon its exercise of a "stand-by commitment" is normally (i) the
Fund's acquisition cost of the Municipal Securities (excluding any accrued
interest which the Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment
-2-
<PAGE>
date during that period. "Stand-by commitments" are exercisable by the Tax-
Exempt Money Fund at any time before the maturity of the underlying Municipal
Securities, and may be sold, transferred or assigned by the Fund only with the
underlying instruments.
The Tax-Exempt Money Fund expects that "stand-by commitments" will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Fund may pay for a
"stand-by commitment" either separately in cash or by paying a higher price for
securities which are acquired subject to the commitment (thus reducing the yield
to maturity otherwise available for the same securities). Where the Tax-Exempt
Money Fund has paid any consideration directly or indirectly for a "stand-by
commitment," its cost will be reflected as unrealized depreciation for the
period during which the commitment was held by the Fund.
The Tax-Exempt Money Fund intends to enter into "stand-by commitments"
only with banks and broker/dealers which, in the Investment Adviser's opinion,
present minimal credit risks. In evaluating the creditworthiness of the issuer
of a "stand-by commitment," the Investment Adviser will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information.
Municipal Securities
--------------------
The Tax-Exempt Money Fund invests primarily in Municipal Securities as
defined in the Prospectus. Municipal Securities include debt obligations issued
by governmental entities to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses, and the
extension of loans to public institutions and facilities. Private activity
bonds that are issued by or on behalf of public authorities to finance various
privately operated facilities are included within the term "Municipal
Securities" only if the interest paid thereon is exempt from regular Federal
income tax and not treated as a specific tax preference item under the Federal
alternative minimum tax.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue" issues, but the Tax-Exempt Money Fund's portfolio may
also include "moral obligation" issues. There are, of course, variations in the
quality of Municipal Securities, both within a particular classification and
between classifications, and the yields on Municipal Securities depend upon a
variety of factors, including general money market conditions, the financial
condition of the issuer, general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation, and the rating of
the issue. The ratings of nationally recognized statistical rating
organizations ("NRSROs") such as Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Services ("S&P") described in the Prospectus and
Appendix hereto represent their opinion as to the quality of Municipal
Securities. It should be emphasized that these ratings are general and are not
absolute standards of quality, and Municipal Securities with the same maturity,
interest rate, and rating may have different yields while Municipal Securities
of the same maturity and interest rate with different ratings may have the same
yield. Subsequent to its purchase by the Fund, an issue of Municipal Securities
may cease to be rated, or its rating may be reduced below the minimum rating
required
-3-
<PAGE>
for purchase by the Fund. The Investment Adviser will consider such an event in
determining whether the Tax-Exempt Money Fund should continue to hold the
obligation.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Money Fund will depend upon the ability of the issuers to meet
their obligations. Each state, the District of Columbia, each of their
political subdivisions, agencies, instrumentalities and authorities, and each
multistate agency of which a state is a member, is a separate "issuer" as that
term is used in this Statement of Additional Information and the Prospectus. An
issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Securities may be
materially adversely affected by litigation or other conditions.
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
Among other instruments, the Tax-Exempt Money Fund may purchase short-
term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes,
Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, the Fund may invest in long-term
tax-exempt instruments, such as municipal bonds and private activity bonds, to
the extent consistent with the maturity restrictions applicable to it.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither Excelsior
Tax-Exempt Fund nor the Investment Adviser will review the proceedings relating
to the issuance of Municipal Securities or the bases for such opinions.
Miscellaneous
-------------
The Funds may not invest in oil, gas, or mineral leases.
-4-
<PAGE>
Additional Investment Limitations
- ---------------------------------
In addition to the investment limitations set forth in the Prospectus,
the Funds are subject to the investment limitations enumerated below, which may
be changed with respect to a particular Fund only by a vote of the holders of a
majority of such Fund's outstanding Shares (as defined under "Miscellaneous" in
the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of securities, or
maintain a short position;
2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Taxable Funds might be deemed to
be underwriters upon disposition of certain portfolio securities acquired within
the limitation on purchases of restricted securities; and except to the extent
that purchase by the Tax-Exempt Money Fund of Municipal Securities or other
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;
3. Purchase or sell real estate, except that each Taxable Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate; and except that the
Tax-Exempt Money Fund may invest in Municipal Securities secured by real estate
or interests therein;
4. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or other mineral exploration or development programs;
5. Invest in or sell puts, calls, straddles, spreads, or any
combination thereof; and
6. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitations might be considered to be the
issuance of a senior security.
In addition, the Money, Government Money and Treasury Money Funds may
not:
7. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and the
Money Fund and the Government Money Fund may enter into repurchase agreements
with respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and (ii) the Money Fund and the Government Money
Fund may lend portfolio securities in an amount not exceeding 30% of their total
assets;
8. Invest in bank obligations having remaining maturities in excess
of one year, except that securities subject to repurchase agreements may bear
longer maturities;
9. Invest in companies for the purpose of exercising management or
control;
-5-
<PAGE>
10. Invest more than 5% of a Funds' total assets in securities issued
by companies which, together with any predecessor, have been in continuous
operation for fewer than three years;
11. Purchase foreign securities; except the Money Fund may purchase
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks and foreign branches of U.S. banks
in an amount not to exceed 20% of its total net assets;
12. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the Investment Company Act
of 1940;
13. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of a Fund's total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of its total assets
would be invested in foreign branches of financial institutions or in domestic
branches of foreign banks;
14. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
securities issued or guaranteed by the U.S. Government or domestic bank
obligations, and (b) neither all finance companies, as a group, nor all utility
companies, as a group, are considered a single industry for purposes of this
policy; and
15. Knowingly invest more than 10% of the value of a Fund's total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available.
In addition, the Tax-Exempt Money Fund may not:
16. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
17. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation;
18. Knowingly invest more than 10% of the value of its total assets
in securities which may be illiquid in light of legal or contractual
restrictions on resale or the absence of readily available market quotations;
-6-
<PAGE>
19. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the United
States; any state or territory; any possession of the U.S. Government; the
District of Columbia; or any of their authorities, agencies, instrumentalities,
or political subdivisions; and
20. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that the Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.
* * *
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
For the purpose of Investment Limitation No. 3, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
Notwithstanding Investment Limitations Nos. 15 and 18 above, the
Companies intend to limit the Funds' investments in illiquid securities to 10%
of each Fund's net (rather than total) assets.
Notwithstanding the proviso in Investment Limitation No. 19, to the
extent that the Tax-Exempt Money Fund has invested more than 20% of the value of
its assets in taxable securities on a temporary defensive basis, the industry
diversification limitation in Investment Limitation No. 19 shall apply to
taxable securities issued or guaranteed by any state, territory, or possession
of the U.S. Government; the District of Columbia; or any of their authorities,
agencies, instrumentalities, or political subdivisions.
NET ASSET VALUE AND NET INCOME
------------------------------
The Companies use the amortized cost method of valuation to value
Shares in the Funds. Pursuant to this method, a security is valued at its cost
initially, and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of fluctuating interest rates on
the market value of the security. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Fund
-7-
<PAGE>
involved would receive if it sold the security. The market value of portfolio
securities held by the Funds can be expected to vary inversely with changes in
prevailing interest rates.
The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated.
If the Boards of Directors believe that the extent of any deviation from a
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take appropriate
steps to eliminate or reduce, to the extent reasonably practicable, any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming Shares in kind; reducing the number
of the Fund's outstanding Shares without monetary consideration; or utilizing a
net asset value per Share determined by using available market quotations.
Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and discount earned on a Fund's assets, less (ii) amortization
of market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of a Company (e.g., administrative, legal, accounting, and directors' fees)
prorated to each portfolio of the Company on the basis of their relative net
assets.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors, Inc., 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 financial institutions ("Shareholder Organizations"). Shares
are also offered for sale directly to institutional investors and to members of
the general public. Different types of Customer accounts at the Shareholder
Organizations may be used to purchase Shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically
"sweep" a Customer's account not less frequently than weekly and invest amounts
in excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in Shares selected by the Customer. Investors purchasing Shares may
include officers, directors, or employees of the particular Shareholder
Organization.
The Companies have authorized certain brokers to accept on their
behalf purchase, exchange and redemption orders. Such brokers are authorized to
designate
-8-
<PAGE>
other intermediaries to accept purchase, exchange and redemption orders on
behalf of the Companies. A Company will be deemed to have received a purchase,
exchange or redemption order when such an authorized broker or designated
intermediary accepts the order.
Shares of the Funds are offered for sale at their net asset value per
Share next computed after a purchase order is received in good order by the
Companies' sub-transfer agent or after a purchase order is accepted by an
authorized broker or designated intermediary. Similarly, an order for the
exchange or redemption of Shares will receive the net asset value per Share next
computed after the order is received in good order by the Companies' sub-
transfer agent or after the order is accepted by an authorized broker or
designated intermediary.
As stated in the Prospectus, no sales charge is imposed by the
Companies on purchases of Shares. In addition, no sales load is charged on the
reinvestment of dividends or distributions or in connection with certain Share
exchanges as described in the Prospectus under "Investor Programs - - Exchange
Privilege."
As described in the Prospectus, Direct Investors may redeem Shares by
writing a check. Checks to redeem Shares are drawn on the Companies' accounts
at The Chase Manhattan Bank ("Chase"). Direct Investors will be subject to the
same rules and regulations that Chase applies to checking accounts and will have
the same rights and duties with respect to stop-payment orders, "stale" checks,
unauthorized signatures, collection of deposits, alterations and unauthorized
endorsements as bank checking account customers do under the New York Uniform
Commercial Code. When a check is presented to Chase for payment, Chase, as the
shareholder's agent, will cause the Fund from which the redemption is requested
to redeem sufficient Shares in the shareholder's account to cover the amount of
the check.
The Companies may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the SEC; (b) the Exchange is closed for other than customary
weekend and holiday closings; (c) the SEC has by order permitted such
suspension; or (d) an emergency exists as determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Each Company reserves the right to honor any request for redemption or
repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value. If payment is made
in securities, a shareholder may incur transaction costs in converting these
securities into cash. Such redemptions in kind will be governed by Rule 18f-1
under the 1940 Act so that a Fund is obligated to redeem its Shares solely in
cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder of a Fund.
-9-
<PAGE>
Under certain circumstances, each Company may, in its discretion,
accept securities as payment for Shares. Securities acquired in this manner
will be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the investor
must deposit any outstanding certificates for Shares with Chase Global Funds
Services Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of a Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund involved if the amount of
the withdrawal payments exceeds the dividends and distributions paid on the
Shares and the appreciation of the investor's investment in the Fund. This in
turn may result in a complete depletion of the shareholder's investment. An
investor may not participate in a program of systematic investing in a Fund
while at the same time participating in the Systematic Withdrawal Plan with
respect to an account in the same Fund. Customers of Shareholder Organizations
may obtain information on the availability of, and the procedures and fees
relating to, the Systematic Withdrawal Plan directly from their Shareholder
Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of any other portfolio of the
Companies or for Trust Shares of Excelsior Institutional Trust. Shares may be
exchanged by wire, telephone or mail and must be made to accounts of identical
registration. There is no exchange fee imposed by the Companies or Excelsior
Institutional Trust. In order to prevent abuse of this privilege to the
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<PAGE>
disadvantage of other shareholders, the Companies and Excelsior Institutional
Trust reserve the right to limit the number of exchange requests of investors to
no more than six per year. The Companies and Excelsior Institutional Trust may
modify or terminate the exchange program at any time upon 60 days' written
notice to shareholders, and may reject any exchange request. Customers of
Shareholder Organizations may obtain information on the availability of, and the
procedures and fees relating to, such program directly from their Shareholder
Organizations.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the Shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged Shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Other Investor Programs
- -----------------------
As described in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program. Shares of the Money,
Government Money and Treasury Money Funds may also be purchased in connection
with certain Retirement Programs. Customers of Shareholder Organizations may
obtain information on the availability of, and the procedures and fees relating
to, such programs directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Excelsior Fund's Charter authorizes its Board of Directors to issue up
to 35 billion full and fractional shares of capital stock; and Excelsior Tax-
Exempt Fund's Charter authorizes its Board of Directors to issue up to 14
billion full and fractional shares of capital stock. Both Charters authorize
the respective Boards of Directors to classify or reclassify any unissued shares
of the respective Companies into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. The
Prospectus describes the classes of shares into which the Companies' authorized
capital is currently classified. Prior to December 28, 1995, Excelsior Fund and
Excelsior Tax-Exempt Fund were known as "UST Master Funds, Inc." and "UST Master
Tax-Exempt Funds, Inc.," respectively.
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued
for payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or
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<PAGE>
dissolution of a Fund, shareholders of that Fund are entitled to receive the
assets available for distribution belonging to that Fund and a proportionate
distribution, based upon the relative asset values of the portfolios of the
Company involved, of any general assets of that Company not belonging to any
particular portfolio of that Company which are available for distribution. In
the event of a liquidation or dissolution of either Company, shareholders of
such Company will be entitled to the same distribution process.
Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of a Company's
aggregate outstanding shares may elect all of that Company's directors,
regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of each Company voting
without regard to class.
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The
exercise of such authority by the Boards of Directors will be subject to the
provisions of the 1940 Act, and the Boards of Directors will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the particular Fund's shareholders at least 30 days prior thereto.
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<PAGE>
Notwithstanding any provision of Maryland law requiring a greater vote
of a Company's Common Stock (or of the Shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, each
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of its outstanding Common Stock voting without regard to class.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The directors and executive officers of the Companies, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
Position Principal Occupation
with During Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Retired; Director of
238 June Road Board, President Excelsior Fund and Excelsior
Stamford, CT 06903 and Treasurer Tax-Exempt Fund (since 1995);
Age: 67 Trustee of Excelsior Funds
and Excelsior Institutional Trust
(since 1995); Vice Chairman of U.S.
Trust Corporation and U.S. Trust New
York (from February 1990 until
September 1995); and Chairman, U.S.
Trust Connecticut (from March 1993 to
May 1997).
Donald L. Campbell Director Retired; Director of
333 East 69th Street Excelsior Fund and Excelsior
Apt. 10-H Tax-Exempt Fund (since 1984);
New York, NY 10021 Director of UST Master
Age: 72 Variable Series, Inc.
(from 1994 to June 1997); Trustee of
Excelsior Institutional Trust (since
1995); and Director, Royal Life
Insurance Co. of New York (since 1991).
Rodman L. Drake Director Director, Excelsior Fund
Continuation Investments and Excelsior Tax-Exempt
Group, Inc. Fund (since 1996); Trustee,
1251 Avenue of the
Americas, 9th Floor Excelsior Institutional
New York, NY 10020 Trust and Excelsior Funds
Age: 55 (since 1994); Director,
Parsons Brinkerhoff Energy Services
Inc. (since 1996); Director, Parsons
Brinkerhoff,
</TABLE>
1. This director is considered to be an "interested person" of Excelsior Fund
and Excelsior Tax-Exempt Fund as defined in the 1940 Act.
-13-
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation
with During Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ------------------
<S> <C> <C>
Inc. (engineering firm)
(since 1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment
and consulting firm) (1994-1997);
Director, Hyperion Total Return Fund,
Inc. and four other funds for which
Hyperion Capital Management, Inc.
serves as investment adviser (since
1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993
to 1996); Director, The Latin America
Smaller Companies Fund, Inc. (since
1993); Member of Advisory Board,
Argentina Private Equity Fund L.P.
(from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and
Director, Mueller Industries, Inc.
(from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of
913 Franklin Lake Road Excelsior Fund and Excelsior
Franklin Lakes, NJ 07417 Tax-Exempt Fund (since 1984);
Age: 73 Director of UST Master
Variable Series, Inc.
(from 1994 to June 1997); and Trustee
of Excelsior Institutional Trust (since
1995).
Wolfe J. Frankl Director Retired; Director of
2320 Cumberland Road Excelsior Fund and Excelsior
Charlottesville, VA 22901 Tax-Exempt Fund (since 1986);
Age: 77 Director of UST Master
Variable Series, Inc. (from 1994 to
June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial, Inc.
(since 1989); Director, The Harbus
Corporation (since 1951); and Trustee,
HSBC Funds Trust and HSBC Mutual Funds
Trust (since 1988).
W. Wallace McDowell, Jr. Director Director, Excelsior Fund
c/o Prospect Capital and Excelsior Tax-Exempt
Corp. Fund (since 1996); Trustee,
43 Arch Street Excelsior Institutional Trust
Greenwich, CT 06830 and Excelsior Funds
Age: 61 (since 1994); Private Investor
(since 1994); Managing Director,
Morgan Lewis Githens & Ahn (from 1991
to 1994); and Director, U.S. Homecare
Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children's
Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and
Jack Morton Productions (since 1987).
Jonathan Piel Director Director, Excelsior Fund and
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation
with During Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ------------------
<S> <C> <C>
558 E. 87th Street Excelsior Tax-Exempt Fund
New York, NY 10128 (since 1996); Trustee, Excelsior
Age: 59 Institutional Trust and
Excelsior Funds (since 1994);
Vice President and Editor, Scientific
American, Inc. (from 1986 to 1994);
Director, Group for The South Fork,
Bridgehampton, New York (since 1993);
and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts
Institute of Technology (since 1984).
Robert A. Robinson Director Director of Excelsior Fund
Church Pension Fund and Excelsior Tax-Exempt Fund
800 Second Avenue (since 1987); Director of UST
New York, NY 10017 Master Variable Series, Inc.
Age: 72 (from 1994 to June 1997); Trustee of
Excelsior Institutional Trust
(since 1995); President Emeritus, The
Church Pension Fund and its affiliated
companies (since 1966); Trustee, H.B.
and F.H. Bugher Foundation and Director
of its wholly owned subsidiaries --
Rosiclear Lead and Flourspar Mining Co.
and The Pigmy Corporation (since 1984);
Director, Morehouse Publishing Co.
(1974-1995); Trustee, HSBC Funds Trust
and HSBC Mutual Funds Trust (since
1982); and Director, Infinity Funds,
Inc. (since 1995).
Alfred C. Tannachion/1/ Director Retired; Director of Excelsior Fund and
6549 Pine Meadows Drive Excelsior Tax-Exempt Fund (since 1985);
Spring Hill, FL 34606 Chairman of the Board of Excelsior Fund
Age: 72 and Excelsior Tax-Exempt Fund (1991-
1997) and Excelsior Institutional Trust
(1996-1997); President and Treasurer of
Excelsior Fund and Excelsior Tax-Exempt
Fund (1994-1997) and Excelsior
Institutional Trust (1996-1997);
Chairman of the Board, President and
Treasurer of UST Master Variable Series,
Inc. (1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
</TABLE>
- ------------------
1. This director is considered to be an "interested person" of Excelsior Fund
and Excelsior Tax-Exempt Fund as defined in the 1940 Act.
-15-
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation
with During Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ------------------
<S> <C> <C>
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55
Michael P. Malloy Assistant Partner of the law firm of
Philadelphia National Secretary Drinker Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 39
Edward Wang Assistant Manager of Blue Sky Compliance,
Chase Global Funds Secretary Chase Global Funds Services
Services Company Company (November 1996 to present);
73 Tremont Street and Officer and Manager of Financial
Boston, MA 02108-3913 Reporting, Investors Bank & Trust
Age: 37 Company (January 1991 to
November 1996).
John M. Corcoran Assistant Vice President, Director of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds
Services Company Services Company (since April 1998);
73 Tremont Street Vice President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds
Age: 33 Services Company (from July 1996
to April 1998); Second Vice President,
Manager of Fund Administration, Chase
Global Funds Services Company (from
October 1993 to July 1996); and Audit
Manager, Ernst & Young LLP (from August
1987 to September 1993).
</TABLE>
Each director receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum with respect to each
Company for services in such capacity. Drinker Biddle & Reath LLP, of which
Messrs. McConnel and Malloy are partners, receives legal fees as counsel to the
Companies. The employees of Chase Global Funds Services Company do not receive
any compensation from the Companies for acting as officers of the Companies. No
person who is currently an officer, director or employee of the Investment
Adviser serves as an officer, director or employee of the Companies. As of July
8, 1998, the directors and officers of each Company as a group owned
beneficially less than 1% of the outstanding shares of each fund of each
Company, and less than 1% of the outstanding shares of all funds of each Company
in the aggregate.
-16-
<PAGE>
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from the Companies
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Companies Expenses to Directors
--------------- --------------- ---------- ---------------
<S> <C> <C> <C>
Donald L. Campbell $33,000 None $38,000 (3)**
Director
Rodman L. Drake $30,000 None $39,500 (4)**
Director
Joseph H. Dugan $33,000 None $38,000 (3)**
Director
Wolfe J. Frankl $31,500 None $36,500 (3)**
Director
W. Wallace McDowell, Jr. $28,500 None $38,000 (4)**
Director
Jonathan Piel $33,000 None $43,000 (4)**
Director
Robert A. Robinson $33,000 None $38,000 (3)**
Director
Alfred C. Tannachion $33,000 None $38,000 (3)**
Director
Frederick S. Wonham $43,000 None $53,000 (4)**
Chairman of the Board,
President and Treasurer
</TABLE>
- ---------------------------
* The "Fund Complex" consists of Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
-17-
<PAGE>
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively
with U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as
Investment Adviser to the Funds. In the Investment Advisory Agreements, U.S.
Trust has agreed to provide the services described in the Prospectus. The
Investment Adviser has also agreed to pay all expenses incurred by it in
connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, if any, purchased for the
Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Funds pursuant to advisory agreements substantially similar to
the Investment Advisory Agreements currently in effect for the Funds.
For the fiscal year ended March 31, 1998, Excelsior Fund paid U.S.
Trust $1,036,066, $1,216,265 and $1,108,480 with respect to the Money,
Government Money and Treasury Money Funds, respectively. For the same period,
Excelsior Tax-Exempt Fund paid U.S. Trust $2,325,765 with respect to the Tax-
Exempt Money Fund. For the fiscal year ended March 31, 1998, U.S. Trust waived
fees totaling $231,368, $168,737, $82,614 and $627,413 with respect to the
Money, Government Money, Treasury Money and Tax-Exempt Money Funds,
respectively.
For the fiscal year ended March 31, 1997, Excelsior Fund paid U.S.
Trust New York $810,101, $1,136,936 and $828,277 with respect to the Money,
Government Money and Treasury Money Funds, respectively. For the same period,
Excelsior Tax-Exempt Fund paid U.S. Trust New York $1,891,333 with respect to
the Tax-Exempt Money Fund. For the fiscal year ended March 31, 1997, U.S. Trust
New York waived fees totaling $215,132, $183,979, $79,008 and $502,764 with
respect to the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds, respectively.
For the fiscal year ended March 31, 1996, Excelsior Fund paid U.S.
Trust New York $1,291,496, $1,224,338 and $621,988 with respect to the Money,
Government Money and Treasury Money Funds, respectively. For the same period,
Excelsior Tax-Exempt Fund paid U.S. Trust New York $1,745,649 with respect to
the Tax-Exempt Money Fund. For the fiscal year ended March 31, 1996, U.S. Trust
New York waived fees totaling $227,463, $172,140, $46,887 and $353,419 with
respect to the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds, respectively.
The Investment Advisory Agreements provide that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the performance of such agreements,
except that the Investment Adviser shall be jointly, but not severally, liable
for a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder. In addition, the Investment Adviser has undertaken
in the Investment Advisory Agreements to maintain its
-18-
<PAGE>
policy and practice of conducting its Asset Management Group independently of
its Banking Group.
Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services, an affiliate of the Distributor, and U.S. Trust
Connecticut (the "Administrators") serve as the Funds' administrators. Under
the Administration Agreements, the Administrators have agreed to maintain office
facilities for the Funds, furnish the Funds with statistical and research data,
clerical, accounting and bookkeeping services, and certain other services
required by the Funds, and to compute the net asset value, net income, "exempt-
interest dividends," and realized capital gains or losses, if any, of the
respective Funds. The Administrators prepare semiannual reports to the SEC,
prepare Federal and state tax returns, prepare filings with state securities
commissions, arrange for and bear the cost of processing Share purchase and
redemption orders, maintain the Funds' financial accounts and records, and
generally assist in the Funds' operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Funds' administrators pursuant to
administration agreements substantially similar to the Administration Agreements
currently in effect for the Funds. Prior to August 1, 1995, administrative
services were provided to the Funds by CGFSC and Concord Holding Corporation
(collectively, the "former administrators") under administration agreements
having substantially the same terms as the Administration Agreements currently
in effect.
For the fiscal year ended March 31, 1998, Excelsior Funds paid CGFSC,
Federated Administrative Services and U.S. Trust $775,667, $847,526 and $607,458
in the aggregate with respect to the Money, Government Money and Treasury Money
Funds, respectively. For the same period, Excelsior Tax-Exempt Fund paid CGFSC,
Federated Administrative Services and U.S. Trust $1,807,345 in the aggregate
with respect to the Tax-Exempt Money Fund. For the fiscal year ended March 31,
1998, CGFSC, Federated Administrative Services and U.S. Trust waived fees
totaling $3 and $96 with respect to the Money and Government Money Funds,
respectively.
For the fiscal year ended March 31, 1997, Excelsior Fund paid CGFSC,
Federated Administrative Services and U.S. Trust New York $630,623, $811,988 and
$464,931 in the aggregate with respect to the Money, Government Money and
Treasury Money Funds, respectively. For the same period, Excelsior Tax-Exempt
Fund paid CGFSC, Federated Administrative Services and U.S. Trust New York
$1,472,582 in the aggregate with respect to the Tax-Exempt Money Fund. For the
fiscal year ended March 31, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York waived fees totaling $8 and $256 with respect to the Money
and Government Money Funds, respectively.
For the period August 1, 1995 through March 31, 1996, Excelsior Fund
paid CGFSC, Federated Administrative Services and U.S. Trust New York $487,151,
$457,681, and $236,672 in the aggregate with respect to the Money, Government
Money and Treasury Money Funds, respectively. For the same period, Excelsior
Tax-Exempt Fund paid CGFSC, Federated Administrative Services and U.S. Trust New
York $889,555 in the aggregate with respect to the Tax-Exempt Money Fund. For
the period August 1, 1995 through March 31, 1996, CGFSC, Federated
Administrative Services and U.S. Trust New York waived fees totaling $705 with
respect to the Government Money Fund.
-19-
<PAGE>
For the period April 1, 1995 through July 31, 1995, Excelsior Fund
paid the former administrators $450,305, $403,443 and $107,685 in the aggregate
with respect to the Money Fund, Government Money Fund and Treasury Money Fund,
respectively. For the same period, Excelsior Tax-Exempt Fund paid the former
administrators $407,281 in the aggregate with respect to the Tax-Exempt Money
Fund. For the period April 1, 1995 through July 31, 1995, the former
administrators waived fees totaling $135 with respect to the Government Money
Fund.
Shareholder Organizations
- -------------------------
As stated in the Prospectus, each Company has entered into agreements
with Shareholder Organizations. Such agreements require the Shareholder
Organizations to provide shareholder administrative services to their Customers
who beneficially own Shares in consideration for a Fund's payment of not more
than the annual rate of 0.40% of the average daily net assets of the Fund's
Shares beneficially owned by Customers of the Shareholder Organization. Such
services may include: (a) acting as recordholder of Shares; (b) assisting in
processing purchase, exchange and redemption transactions; (c) providing
periodic statements showing a Customer's account balances and confirmations of
transactions by the Customer; (d) providing tax and dividend information to
shareholders as appropriate; (e) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Companies to Customers;
and (f) providing or arranging for the provision of other related services.
The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the
Companies' arrangements with Shareholder Organizations are in effect, the
selection and nomination of the members of the Companies' Boards of Directors
who are not "interested persons" (as defined in the 1940 Act) of the Companies
will be committed to the discretion of such Disinterested Directors.
For the fiscal years ended March 31, 1998, 1997 and 1996, payments to
Shareholder Organizations totaled $231,371, $215,140 and $227,463; $168,833,
$184,235 and $172,980; $82,614, $79,008 and $46,887; and $627,413, $502,764 and
$353,419 with respect to the Money, Government Money, Treasury Money and Tax-
Exempt Money Funds, respectively. Of these respective amounts, $231,347,
$215,090 and $227,463; $168,139, $182,579 and $168,064; $82,614, $79,008 and
$46,887; and $627,412, $502,764 and $353,419 were paid to affiliates of U.S.
Trust with respect to the Money, Government Money, Treasury Money and Tax-Exempt
Money Funds, respectively.
-20-
<PAGE>
Expenses
- --------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Funds bear the expenses incurred in their operations. Expenses
of the Funds include taxes; interest; fees (including fees paid to the
Companies' directors and officers who are not affiliated with the Distributor or
the Administrators); SEC fees; state securities qualifications fees; costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders; advisory, administration and administrative servicing fees;
charges of the custodian, transfer agent, and dividend disbursing agent; certain
insurance premiums; outside auditing and legal expenses; cost of independent
pricing services; costs of shareholder reports and shareholder meetings; and any
extraordinary expenses. The Funds also pay for brokerage fees and commissions
in connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase") serves as custodian of the Funds'
assets. Under the Custodian Agreements, Chase has agreed to: (i) maintain a
separate account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive all
income and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to each Company's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreements, notwithstanding any delegation.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem Shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to
each Company's Board of Directors concerning the Funds' operations. For its
transfer agency, dividend disbursing, and subaccounting services, U.S. Trust New
York is entitled to receive $15.00 per annum per account and subaccount. In
addition, U.S. Trust New York is entitled to be reimbursed for its out-of-pocket
expenses for the cost of forms, postage, processing purchase and redemption
orders, handling of proxies, and other similar expenses in connection with the
above services.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreements, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. For the services
provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum
per account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Companies for any of its sub-transfer agency
-21-
<PAGE>
services. U.S. Trust New York may, from time to time, enter into sub-transfer
agency arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Investment Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of all portfolio securities of each of
the Funds.
The Funds do not intend to seek profits from short-term trading.
Their annual portfolio turnover will be relatively high, but brokerage
commissions are not normally paid on money market instruments, and portfolio
turnover is not expected to have a material effect on the net income of the
Funds.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
With respect to over-the-counter transactions, the Funds, where possible, will
deal directly with the dealers who make a market in the securities involved,
except in those circumstances where better prices and execution are available
elsewhere.
The Investment Advisory Agreements between the Companies and the
Investment Adviser provide that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment Adviser shall
consider factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and whether such broker or dealer is selling
shares of the Companies, and the reasonableness of the commission, if any, for
the specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreements authorize the
Investment Adviser, to the extent permitted by law and subject to the review of
the Companies' Boards of Directors from time to time with respect to the extent
and continuation of the policy, to cause the Funds to pay a broker which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker for effecting the same transaction, provided
that the Investment Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular transaction
or the overall responsibilities of the Investment Adviser to the accounts as to
which it exercises investment discretion. Such brokerage and research services
might consist of reports and statistics on specific companies or industries,
general summaries of groups of stocks and their comparative earnings, or broad
overviews of the stock market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fees payable by the Funds. Such
information may be useful to the Investment Adviser
-22-
<PAGE>
in serving the Funds and other clients and, conversely, supplemental information
obtained by the placement of business of other clients may be useful to the
Investment Adviser in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Distributor, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the SEC.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Funds. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Funds
and another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Investment Adviser believes to be equitable to the Funds and
such other investment company or common trust fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Funds or the size of the position obtained by the Funds. To the extent
permitted by law, the Investment Adviser may aggregate the securities to be sold
or purchased for the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 1998, none of the Funds held any securities of Excelsior Fund's or
Excelsior Tax-Exempt Fund's regular brokers or dealers or their parents.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
March 31, 1998 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, is counsel to the Companies, and will pass upon the legality
of the Shares offered by the Prospectus.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
-23-
<PAGE>
Generally
- ---------
The following supplements the tax information contained in the
Prospectus.
Each of the Funds is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. If, for any reason, a Fund does not qualify
for a taxable year for the special Federal tax treatment afforded regulated
investment companies, such Fund would be subject to Federal tax on all of its
taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether
or not derived from interest on Municipal Securities) would be taxable as
ordinary income to shareholders to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to shareholders who have failed
to provide a correct tax identification number in the manner required, who are
subject to withholding by the Internal Revenue Service for failure properly to
include on their return payments of taxable interest or dividends, or who have
failed to certify to the Fund when required to do so either that they are not
subject to backup withholding or that they are "exempt recipients."
Tax-Exempt Money Fund
- ---------------------
The Tax-Exempt Money Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Tax-Exempt Money Fund would not be suitable for tax-
exempt institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Tax-Exempt Money Fund
dividends being tax-exempt, but such dividends would be ultimately taxable to
the beneficiaries when distributed to them. In addition, the Tax-Exempt Money
Fund may not be an appropriate investment for entities which are "substantial
users" of facilities financed by private activity bonds or "related persons"
thereof. "Substantial user" is defined under the Treasury Regulations to
include a non-exempt person who regularly uses a part of such facilities in his
trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, who occupies more than 5% of
the usable area of such facilities or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. "Related persons"
include certain related natural persons, affiliated corporations, a partnership
and its partners and an S Corporation and its shareholders.
-24-
<PAGE>
In order for the Tax-Exempt Money Fund to pay exempt-interest
dividends for any taxable year, at least 50% of the aggregate value of the
Fund's portfolio must consist of exempt-interest obligations at the close of
each quarter of its taxable year. Within 60 days after the close of the taxable
year, the Tax-Exempt Money Fund will notify its shareholders of the portion of
the dividends paid by the Fund which constitutes an exempt-interest dividend
with respect to such taxable year. However, the aggregate amount of dividends
so designated by the Tax-Exempt Money Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Tax-Exempt Money Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of
total dividends paid by the Tax-Exempt Money Fund with respect to any taxable
year which qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends from the Tax-Exempt Money Fund for such year.
Interest on indebtedness incurred by a shareholder to purchase or
carry the Tax-Exempt Money Fund's Shares generally is not deductible for Federal
income tax purposes.
Excelsior Tax-Exempt Fund intends to distribute to shareholders of the
Tax-Exempt Money Fund any investment company taxable income earned by the Tax-
Exempt Money Fund for each taxable year. In general, the Tax-Exempt Money
Fund's investment company taxable income will be its taxable income (including
taxable interest and short-term capital gains) subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. Such distributions
will be taxable to the shareholders as ordinary income (whether paid in cash or
additional Shares).
* * *
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
YIELD INFORMATION
-----------------
The standardized annualized seven-day yields for the Shares of the
Funds are computed separately by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the Fund
involved, having a balance of one Share at the beginning of the period, dividing
the net change in account value by the value of the account at the beginning of
the period to obtain the base period return, and multiplying the base period
return by (365/7). The net change in the value of an account in each of the
Funds includes the value of additional Shares purchased with dividends from the
original Share and dividends declared on both the original Share and any such
additional Shares, net of all fees that are charged to all shareholder accounts
and to the particular series of Shares in proportion to the length of the base
period, other than nonrecurring account or any sales charges. For any account
fees that vary with the size of the account, the amount of fees charged is
computed with respect to the Fund's mean (or median) account size. The capital
changes to be excluded from the
-25-
<PAGE>
calculation of the net change in account value are realized gains and losses
from the sale of securities and unrealized appreciation and depreciation. In
addition, each Fund may use effective compound yield quotations for its Shares
computed by adding 1 to the unannualized base period return (calculated as
described above), raising the sums to a power equal to 365 divided by 7, and
subtracting 1 from the results.
From time to time, in advertisements, sales literature or in reports
to shareholders, the yields of each Money Market Fund's Shares may be quoted and
compared to those of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, the yield of such a Fund's
Shares may be compared to the Donoghue's Money Fund average, which is an average
compiled by Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
Advertisements, sales literature or reports to shareholders may from time to
time also include a discussion and analysis of each Fund's performance,
including without limitation, those factors, strategies and techniques that,
together with market conditions and events, materially affected each Fund's
performance.
The current yields for the Funds' Shares may be obtained by calling
(800) 446-1012. For the seven-day period ended March 31, 1998, the annualized
yields for Shares of the Money Fund, Government Money Fund, Treasury Money Fund
and Tax-Exempt Money Fund were 5.08%, 5.07%, 4.79% and 3.09%, respectively, and
the effective yields for Shares of such respective Funds were 5.21%, 5.19%,
4.90% and 3.14%.
The "tax-equivalent" yield of the Tax-Exempt Money Fund is computed
by: (a) dividing the portion of the yield (calculated as above) that is exempt
from Federal income tax by one minus a stated Federal income tax rate and (b)
adding that figure to that portion, if any of the yield that is not exempt from
Federal income tax. Tax-equivalent yields assume the payment of Federal income
taxes at a rate of 31%.
Based on the foregoing calculation, the annualized tax-equivalent
yield of the Tax-Exempt Money Fund for the seven-day period ended March 31, 1998
was 4.48%.
-26-
<PAGE>
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to a Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company involved not belonging to a particular portfolio of that
Company. In determining the net asset value of a Fund's Shares, assets
belonging to the Fund are charged with the direct liabilities in respect of that
Fund and with a share of the general liabilities of the Company involved which
are normally allocated in proportion to the relative asset values of the
Company's portfolios at the time of allocation. Subject to the provisions of
the Companies' Charters, determinations by the Boards of Directors as to the
direct and allocable liabilities, and the allocable portion of any general
assets with respect to a particular Fund, are conclusive.
As of July 8, 1998, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
As of July 8, 1998, the name, address and percentage ownership of each
person that beneficially owned 5% or more of the outstanding Shares of a Fund
were as follows: Government Money Fund: Siemans Sinking Fund, c/o United
States Trust Company of New York, 114 West 47th Street, New York, New York
10036, 12.11%; and TBS Shipping International LTD, c/o United States Trust
Company of New York, 114 West 47th Street, New York, New York 10036, 6.24%; and
Treasury Money Fund: AT&T Sinking Fund, c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10036, 8.07%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, 1998 (the
"1998 Annual Reports") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the 1998 Annual Reports
are incorporated by reference herein. The financial statements included in the
1998 Annual Reports for the Money, Government Money, Treasury Money and Tax-
Exempt Money Funds have been audited by the Companies' independent auditors,
Ernst & Young LLP, whose reports thereon also appear in the 1998 Annual Reports
and are incorporated herein by reference. Such financial statements have been
incorporated herein in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing. Additional copies of the 1998
Annual Reports may be obtained at no charge by telephoning CGFSC at the
telephone number appearing on the front page of this Statement of Additional
Information.
-27-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
A-3
<PAGE>
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or
A-4
<PAGE>
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation 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 or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - 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
A-5
<PAGE>
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in 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.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
A-6
<PAGE>
"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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
A-7
<PAGE>
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these 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.
A-8
<PAGE>
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-9
<PAGE>
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
New York Tax-Exempt Money Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the New York Tax-Exempt Money
Fund (the "Fund") of Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt
Fund") dated August 1, 1998 (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 described
herein ("Shares") should be made without reading the Prospectus. A copy of the
Prospectus may be obtained by writing Excelsior Tax-Exempt Fund c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling
(800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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<S> <C>
INVESTMENT OBJECTIVE AND POLICIES...................................... 1
Additional Information on Portfolio Instruments................... 1
Special Considerations Relating to New York Municipal Securities.. 5
Additional Investment Limitations................................. 18
NET ASSET VALUE AND NET INCOME......................................... 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................... 21
INVESTOR PROGRAMS...................................................... 22
Systematic Withdrawal Plan........................................ 22
Exchange Privilege................................................ 23
Other Investor Programs........................................... 23
DESCRIPTION OF CAPITAL STOCK........................................... 24
MANAGEMENT OF THE FUND................................................. 25
Directors and Officers............................................ 25
Investment Advisory and Administration Agreements................. 32
Shareholder Organizations......................................... 32
Expenses.......................................................... 33
Custodian and Transfer Agent...................................... 33
PORTFOLIO TRANSACTIONS................................................. 34
INDEPENDENT AUDITORS................................................... 36
COUNSEL................................................................ 36
ADDITIONAL INFORMATION CONCERNING TAXES................................ 36
YIELD INFORMATION...................................................... 38
MISCELLANEOUS.......................................................... 39
APPENDIX A............................................................. A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The investment objective and policies of the Fund are described in the
Prospectus. The following information supplements the description of the
investment objective and policies as set forth in the Prospectus.
Additional Information on Portfolio Instruments
- -----------------------------------------------
Municipal Securities
--------------------
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the term "Municipal Securities" only if the interest paid
thereon is exempt from regular Federal income tax and not treated as a specific
tax preference item under the Federal alternative minimum tax.
The Fund may hold tax-exempt derivatives which may be in the form of
tender option bonds, participations, beneficial interests in a trust,
partnership interests or other forms. A number of different structures have
been used. For example, interests in long-term fixed-rate Municipal Securities,
held by a bank as trustee or custodian, are coupled with tender option, demand
and other features when the tax-exempt derivatives are created. Together, these
features entitle the holder of the interest to tender (or put) the underlying
Municipal Security to a third party at periodic intervals and to receive the
principal amount thereof. In some cases, Municipal Securities are represented
by custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying municipal security at its face
value to the sponsor (usually a bank or broker dealer or other financial
institution), which is paid periodic fees equal to the difference between the
bond's fixed coupon rate and the rate that would cause the bond, coupled with
the tender option, to trade at par on the date of a rate adjustment. The Fund
may hold tax-exempt derivatives, such as participation interests and custodial
receipts, for Municipal Securities which give the holder the right to receive
payment of principal subject to the conditions described above. The Internal
Revenue Service has not ruled on whether the interest received on tax-exempt
derivatives in the form of participation interests or custodial receipts is tax-
exempt, and accordingly, purchases of any such interests or receipts are based
on the opinions of counsel to the sponsors of such derivative securities.
Neither the Fund nor the Investment Adviser will independently review the
underlying proceedings related to the creation of any tax-exempt derivatives or
the bases for such opinions.
<PAGE>
Before purchasing a tax-exempt derivative for the Fund, the investment
adviser is required by the Fund's Amortized Cost Procedures to conclude that the
tax-exempt security and the supporting short-term obligation involve minimal
credit risks and are Eligible Securities under the Procedures. In evaluating
the creditworthiness of the entity obligated to purchase the tax-exempt
security, United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively
with U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") will review
periodically the entity's relevant financial information.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue" issues, but the Fund's portfolio may also include
"moral obligation" issues. There are, of course, variations in the quality of
Municipal Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of nationally recognized statistical rating organizations
("NRSROs") such as Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Ratings Group ("S&P") described in the Prospectus and Appendix hereto
represent their opinion as to the quality of Municipal Securities. It should be
emphasized that these ratings are general and are not absolute standards of
quality, and Municipal Securities with the same maturity, interest rate, and
rating may have different yields while Municipal Securities of the same maturity
and interest rate with different ratings may have the same yield. Subsequent to
its purchase by the Fund, an issue of Municipal Securities may cease to be
rated, or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Investment Adviser will consider such an event in
determining whether the 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 Prospectus. An issuer's obligations
under its Municipal Securities are subject to the provisions of bankruptcy,
insolvency, and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Federal or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions.
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial
-2-
<PAGE>
facilities. State and local governments are authorized in most states to issue
private activity bonds for such purposes in order to encourage corporations to
locate within their communities. The principal and interest on these obligations
may be payable from the general revenues of the users of such facilities.
Among other instruments, the Fund may purchase short-term General
Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and
other forms of short-term loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, the Fund may invest in long-term
tax-exempt instruments, such as municipal bonds and private activity bonds, to
the extent consistent with the maturity restrictions applicable to it.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
the Investment Adviser will review the proceedings relating to the issuance of
Municipal Securities or the bases for such opinions.
Insured Municipal Securities
----------------------------
The Fund may purchase Municipal Securities which are insured as to
timely payment of principal and interest at the time of purchase. The insurance
policies will usually be obtained by the issuer of the bond at the time of its
original issuance. Bonds of this type will be acquired only if at the time of
purchase they satisfy quality requirements generally applicable to Municipal
Securities as described in the Prospectus. Although insurance coverage for the
Municipal Securities held by the Fund reduces credit risk by insuring that the
Fund will receive timely payment of principal and interest, it does not protect
against market fluctuations caused by changes in interest rates and other
factors. The Fund may invest more than 25% of its net assets in Municipal
Securities covered by insurance policies.
Money Market Instruments
------------------------
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 Securities 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
-3-
<PAGE>
rated, determined to be of comparable quality by the Investment Adviser. These
rating symbols are described in Appendix A hereto.
Variable and Floating Rate Instruments
--------------------------------------
With respect to variable and floating rate instruments described in
the Prospectus, the Investment Adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers of such instruments and will
continuously monitor their financial ability to meet payment on demand. In
determining dollar-weighted average portfolio maturity and whether a variable or
floating rate instrument has a remaining maturity of 13 months or less, the
maturity of each instrument will be computed in accordance with guidelines
established by the Securities and Exchange Commission (the "SEC").
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 the securities underlying the repurchase agreement). Securities subject
to repurchase agreements are held by the Fund's custodian or in the Federal
Reserve/Treasury Money book-entry system. Repurchase agreements are considered
loans by the Fund under the Investment Company Act of 1940, as amended (the
"1940 Act").
When-Issued and Forward Transactions
------------------------------------
When the Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. Because the Fund will set aside cash or liquid assets
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and ability to manage its portfolio might be affected in the event its
forward commitments or commitments to purchase "when-issued" securities ever
exceed 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.
-4-
<PAGE>
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 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
Securities 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 Securities
at a specified price. The amount payable to the Fund upon its exercise of a
"stand-by commitment" is normally (i) the Fund's acquisition cost of the
Municipal Securities (excluding any accrued interest which the Fund paid on
their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. "Stand-by commitments" are
exercisable by the Fund at any time before the maturity of the underlying
Municipal Securities, and may be sold, transferred or assigned by the Fund only
with the underlying instruments.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for securities which are acquired
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities). Where the Fund has paid any consideration
directly or indirectly for a "stand-by commitment," its cost will be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
The Fund intends to enter into "stand-by commitments" only with banks
and broker/dealers which, in the Investment Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Investment Adviser will review periodically the issuer's
assets, liabilities, contingent claims and other relevant financial information.
Special Considerations Relating to New York Municipal Securities
- ----------------------------------------------------------------
Some of the significant financial considerations relating to the
Fund's investments in New York Municipal Securities are summarized below. This
summary information is not intended to be a complete description and is
principally derived from official statements relating
-5-
<PAGE>
to issues of New York Municipal Securities that were available prior to the date
of this Statement of Additional Information. The accuracy and completeness of
the information contained in those official statements have not been
independently verified.
State Economy. New York State (the "State") is the third most populous state in
- -------------
the nation and has a relatively high level of personal wealth. The State's
economy is diverse with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a very
small share of the nation's farming and mining activity. The State has a
declining proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries. New York City (the
"City"), which is the most populous city in the State and nation and is the
center of the nation's largest metropolitan area, accounts for a large portion
of the State's population and personal income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially.
Moderate growth is projected to continue in 1998 and 1999 for
employment, wages, and personal income, although the growth rates will lessen
gradually during the course of the two years. Overall employment growth is
expected to continue at a modest rate, reflecting the slowing growth in the
national economy, continued spending restraint in government, and restructuring
in the health care, social service, and banking sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the "Governor") to
- ------------
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
The State's budget for the 1997-98 fiscal year was adopted by the
Legislature on August 4, 1997, more than four months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for State-supported debt
service. The State Financial Plan for the 1997-98 fiscal year was formulated on
August 11, 1997 and was based on the State's budget as enacted by the
Legislature, as well as actual results for the first quarter of the current
fiscal year (the "1997-98 State Financial Plan"). In recent years, the State
has failed to adopt a budget prior to the beginning of its fiscal year. There
can be no
-6-
<PAGE>
assurance that State budgets in future fiscal years will be adopted by the April
1 statutory deadline.
The Governor is required by law to propose a balanced budget each
year. In order to address any potential remaining budget gap, the Governor is
expected to make additional proposals to bring receipts in line with
disbursements. The State has closed projected budget gaps of $5.0 billion, $3.9
billion and $2.3 billion in its 1995-96, 1996-97 and 1997-98 fiscal years,
respectively.
The 1997-98 General Fund Financial Plan is projected to be balanced on
a cash basis, with a projected cash surplus of $1.83 billion. As compared to
the Governor's Executive Budget as amended in February 1997, the State's adopted
budget for 1997-98 increased General Fund spending by $1.7 billion, primarily
from increases for local assistance ($1.3 billion). Resources used to fund
these additional expenditures include increased revenues projected for the 1997-
98 fiscal year, increased resources produced in the 1996-97 fiscal year that
will be utilized in 1997-98, re-estimates of social service, fringe benefit and
other spending, and certain non-recurring resources.
The 1997-98 adopted budget includes multi-year reductions, including a
State funded property and local income tax reduction program, estate tax relief,
utility gross receipts tax reductions, permanent reductions in the State sales
tax on clothing, and elimination of assessments on medical providers. These
reductions are intended to reduce the overall level of State and local taxes in
New York and to improve the State's competitive position vis-a-vis other states.
The various elements of the State and local tax and assessments reductions have
little or no impact on the 1997-98 State Financial Plan, and do not begin to
materially affect the outyear projections until the State's 1999-2000 fiscal
year.
Other actions taken in the 1997-98 adopted budget add further pressure
to future budget balance in New York State. For example, the fiscal effects of
tax reductions adopted in the 1997-98 budget are projected to grow more
substantially beyond the 1998-99 fiscal year, with incremental costs averaging
in excess of $1.3 billion annually over the last three years of the tax
reduction program. These incremental costs reflect the phase-in of State-funded
school property tax and local income tax relief; the phase-out of the
assessments on medical providers; and reductions in estate and gift levies,
utility gross receipts taxes, and the State sales tax on clothing. The full
annual cost of the enacted tax reduction package is estimated at approximately
$4.8 billion when fully effective in State fiscal year 2001-02. In addition,
the 1997-98 budget included multi-year commitments for school aid and pre-
kindergarten early learning programs which could add as much as $1.4 billion in
costs when fully annualized in fiscal year 2001-02. These spending commitments
are subject to annual appropriation.
On September 11, 1997, the New York State Comptroller issued a report
which noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in
-7-
<PAGE>
the 2001-2002 State fiscal year. The report noted that these gaps would be
smaller if recurring spending reductions produce savings in earlier years. The
State Comptroller has also stated that if Wall Street earnings moderate and the
State experiences a moderate recession, the gap for the 2001-2002 State fiscal
year could grow to nearly $12 billion.
The Governor presented his 1998-99 Executive Budget to the Legislature
on January 20, 1998. The Executive Budget contains financial projections for
the State's 1997-98 through 2000-01 fiscal years, detailed estimates of receipts
and a proposed Capital Program and Financing Plan for the 1997-98 through 2002-
03 fiscal years. It is expected that the Governor will prepare amendments to
his Executive Budget as permitted under law and that these amendments will be
reflected in a revised Financial Plan. There can be no assurance that the
Legislature will enact into law the Executive Budget as proposed by the
Governor, or that the State's adopted budget projections will not differ
materially and adversely from the projections set forth therein.
The 1998-99 Financial Plan is projected to be balanced on a cash basis
in the General Fund. Total General Fund receipts, including transfers from
other funds, are projected to be $36.22 billion, an increase of $1.02 billion
over projected receipts in the current fiscal year. Total General Fund
disbursements, including transfers to other funds, are projected to be $36.18
billion, an increase of $1.02 billion over the projected expenditures (including
pre-payments), for the current fiscal year. As compared to the 1997-98 State
Financial Plan, the Executive Budget proposes year-to-year growth in General
Fund spending of 2.89 percent. State Funds spending (i.e., General Fund plus
other dedicated funds, with the exception of Federal aid) is projected to grow
by 8.5 percent. Spending from All Governmental Funds (excluding transfers) is
proposed to increase by 7.6 percent from the prior fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are projected at $187 million in
1998-99. The Budget also proposes several new tax-cut initiatives and other
funding changes that are projected to further reduce receipts available to the
General Fund by over $200 million. These initiatives include reducing the fee
to register passenger motor vehicles and earmarking a larger portion of such
fees to dedicated funds and other purposes; extending the number of weeks in
which certain clothing purchases are exempt from sales taxes; more fully
conforming State law to reflect recent Federal changes in estate taxes;
continuing lower pari-mutuel tax rates; and accelerating scheduled property tax
relief for farmers from 1999 to 1998. In addition to the specific tax and fee
reductions discussed above, the Executive Budget also proposes establishing a
reserve of $100 million to permit the acceleration into 1998-99 of other tax
reductions that are otherwise scheduled in law for implementation in future
fiscal years.
The Division of the Budget estimates that the 1998-99 Financial Plan
includes approximately $62 million in non-recurring resources, comprising less
than two-tenths of one
-8-
<PAGE>
percent of General Fund disbursements. The non-recurring resources projected for
use in 1998-99 consist of $27 million in retroactive Federal welfare
reimbursements for family assistance recipients with HIV/AIDS, $25 million in
receipts from the Housing Finance Agency that were originally anticipated in
1997-98, and $10 million in other measures, including $5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated at
$4.82 billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and bridge program; $815 million for environmental
activities; $379 million for correctional services; $228 million for the State
University of New York ("SUNY") and the City University of New York ("CUNY");
$290 million for mental hygiene projects; and $375 million for CEFAP.
Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with Federal grants financing the remaining 26 percent.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors may be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. In addition, the financial plan is
based upon forecasts of national and State economic activity. Economic
forecasts have frequently failed to predict accurately the timing and magnitude
of changes in the national and the State economies. Actual results, however,
could differ materially and adversely from the projections set forth in a
financial plan, and those projections may be changed materially and adversely
from time to time.
In the past, the State has taken management actions and has made use
of internal sources to address potential State financial plan shortfalls. The
Division of Budget believes it could take similar actions should variances occur
in its projections for the current fiscal year.
Recent Financial Results. The General Fund is the principal operating fund of
- ------------------------
the State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund
and receives almost all State taxes and other resources not dedicated to
particular purposes.
The State ended the first six months of its 1997-98 fiscal year with
an unaudited General Fund cash balance of $3.2 billion, or $254 million above
the August Financial Plan estimate. Total unaudited receipts, including
transfers from other funds, totaled $18.8 billion, or $340 million higher than
expected. The additional receipts reflected higher-than-anticipated tax
revenues of $244 million and miscellaneous receipts of $93 million. Unaudited
General Fund spending for the same period equaled $16.0 billion, or $86 million
above the cashflow projections published in the August Financial Plan. For
fiscal year 1997-98, total General Fund receipts were projected at $35.09
billion, an increase of $2.05 billion from 1996-97 results. Total
disbursements, including transfers to capital projects, debt service and other
funds, were projected at $34.60 billion, or 5.2 percent higher than
disbursements in 1996-97.
-9-
<PAGE>
The mid-year update projected a closing balance in the General Fund of
$927 million, which was composed of a $530 million reserve for future needs, a
$332 million balance in the Tax Stabilization Reserve Fund ("TSRF") and a $65
million balance in the Contingency Reserve Fund ("CRF").
As part of the 1997-98 Adopted Budget Report, the State also issued
its update to the GAAP-basis Financial Plan for the State's 1997-98 fiscal year,
based on the cash-basis 1997-98 State Financial Plan completed in August. The
GAAP-basis update projected a General Fund operating deficit of $959 million,
primarily reflecting the use of a portion of the 1996-97 cash surplus to fund
1997-98 liabilities, offset by the $530 million reserve for future needs.
Debt Limits and Outstanding Debt. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
----
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues by issuing tax and
revenue anticipation notes and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") to restructure the way the State makes certain local aid
payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the
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<PAGE>
economic viability of its programs, JDA's loan and loan guarantee activities had
been suspended since the Governor took office in 1995. As a result of the
structural imbalances in JDA's capital structure, and defaults in its loan
portfolio and loan guarantee program incurred between 1991 and 1996, JDA would
have experienced a debt service cash flow shortfall had it not completed its
recent refinancing. JDA anticipates that it will transact additional
refinancings in 1999, 2000 and 2003 to complete its long-term plan of finance
and further alleviate cash flow imbalances which are likely to occur in future
years. The State does not anticipate that it will be called upon to make any
payments pursuant to the State guarantee in the 1997-98 fiscal year. JDA
recently resumed its lending activities under a revised set of lending programs
and underwriting guidelines.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount to yield net proceeds not in
excess of $4.7 billion (exclusive of certain refunding bonds). Over a period of
years, the issuance of these long-term obligations, which were to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal
borrowing of the State at $4.7 billion, less net proceeds of bonds issued by
LGAC and bonds issued to provide for capitalized interest, except in cases where
the Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing
above the cap was thus permitted in any fiscal year, it was required by law to
be reduced to the cap by the fourth fiscal year after the limit was first
exceeded. As of June 1995, LGAC had issued bonds to provide net proceeds of
$4.7 billion, completing the program.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On
March 2, 1998, S&P affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State
and stated that the outlook for the State's general obligations is stable.
The State anticipates that its capital programs will be financed in
part by State and public authorities borrowings in the 1997-98 fiscal year. The
State expects to issue $605 million in general obligation bonds (including $140
million for purposes of redeeming outstanding bond anticipation notes) and $140
million in general obligation commercial paper. The Legislature
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<PAGE>
has also authorized the issuance of $311 million in certificates of
participation (including costs of issuance, reserve funds and other costs)
during the State's 1997-98 fiscal year for equipment purchases. The projection
of State borrowings for the 1997-98 fiscal year is subject to change as market
conditions, interest rates and other factors vary throughout the fiscal year.
The proposed 1997-98 through 2002-03 Capital Program and Financing
Plan was released with the 1998-99 Executive Budget on January 20, 1998. As a
part of that Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
As a result of these changes, the State's 1997-98 borrowing plan now
reflects: $501 million in general obligation bonds (including $140 million for
purposes of redeeming outstanding bond anticipation notes) and $140 million in
general obligation commercial paper; the issuance of $83 million in COPs for
equipment purchases; and approximately $1.8 billion in borrowings by public
authorities pursuant to lease-purchase and contractual-obligation financings for
capital programs of the State, including costs of issuance, reserve funds, and
other costs, net of anticipated refundings and other adjustments for 1997-98
capital projects. The projection of State borrowings for the 1997-98 fiscal
year is subject to change as market conditions, interest rates and other factors
vary through the end of the fiscal year.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or its officers
- ----------
or employees could have a substantial or long-term adverse effect on New York
State finances. Among the more significant of these cases are those that
involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (5) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (6) challenges to
regulations promulgated by the Superintendent of Insurance establishing certain
excess medical malpractice premium rates; (7) challenges to certain aspects of
petroleum business taxes; (8) action alleging damages resulting from the failure
by the State's Department of Environmental Conservation to timely provide
certain data; (9) challenges to the constitutionality of Public Health Law 2807-
d, which imposes a gross receipts tax from certain patient care services; (10)
an action seeking reimbursement from the State for certain costs arising out of
the provision of pre-school services and programs for children with handicapped
conditions; (11) action seeking enforcement of certain sales and excise taxes
and tobacco products and motor fuel sold to non-Indian consumers on Indian
reservations; and (12) a challenge to the constitutionality of Clean Water/Clean
Air Bond Act.
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<PAGE>
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97 and $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision
in the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's 1994-
95 fiscal year. Litigation challenging the constitutionality of the treatment
of certain moneys held in a reserve fund was settled in June 1996 and certain
amounts in a Supplemental Reserve Fund previously credited by the State against
prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could
affect adversely the financial condition of the State in the 1997-98 fiscal year
or thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings may affect the ability of the State to maintain a
balanced financial plan. An adverse decision in any of these proceedings may
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan. In its audited financial statements for
the 1996-97 fiscal year, the State reported its estimated liability for awarded
and anticipated unfavorable judgments to be $364 million, of which $134 million
is expected to be paid during the 1997-98 fiscal year.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in part, to the
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fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets may be impaired,
and the market price of its outstanding debt may be materially and adversely
affected, if any of the Authorities were to
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<PAGE>
default on their respective obligations, particularly with respect to debt that
is State-supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the State of New York
- ----------------------------------
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts currently projected or that State budgets will be adopted by the
April 1 statutory deadline or that any such reductions or delays will not have
adverse effects on the City's cash flow or expenditures. In addition, the
Federal budget negotiation process could result in a reduction in or a delay in
the receipt of Federal grants which could have additional adverse effects on the
City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell short-
term notes to the public again until 1979. In 1975, S&P suspended its A rating
of City bonds. This suspension remained in effect until March 1981, at which
time the City received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On February 3, 1998, S&P placed a BBB+ rating
on the City's general obligation debt on CreditWatch with positive implications.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded nearly $28 billion of the City's debt from Baa1 to A3.
New York City is heavily dependent on New York State and Federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future Federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing
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assistance to the City by refunding maturing City short-term debt and
transferring to the City funds received from sales of MAC bonds and notes. MAC
is authorized to issue bonds and notes payable from certain stock transfer tax
revenues, from the City's portion of the State sales tax derived in the City
and, subject to certain prior claims, from State per capita aid otherwise
payable by the State to the City. Failure by the State to continue the
imposition of such taxes, the reduction of the rate of such taxes to rates less
than those in effect on July 2, 1975, failure by the State to pay such aid
revenues and the reduction of such aid revenues below a specified level are
included among the events of default in the resolutions authorizing MAC's long-
term debt. The occurrence of an event of default may result in the acceleration
of the maturity of all or a portion of MAC's debt. MAC bonds and notes
constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City. As of June 30, 1997, MAC had
outstanding an aggregate of approximately $4.267 billion of its bonds. MAC is
authorized to issue bonds and notes to refund its outstanding bonds and notes
and to fund certain reserves, without limitation as to principal amount, and to
finance certain capital commitments to the Transit Authority and the New York
City School Construction Authority through the 1997 fiscal year in the event the
City fails to provide such financing.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and CUNY and
reflected the City's expense and capital budgets for the 1998 fiscal year, which
were adopted on June 6, 1997. The 1998-2001 Financial Plan projected revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP.
The 1998-99 Financial Plan projects General Fund receipts (including transfers
from other funds) of $36.22 billion, an increase of $1.02 billion over the
estimated 1997-98 level. Recurring growth in the State General Fund tax base is
projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates
for 1996-97 or currently estimated for 1997-98, but roughly equivalent to the
rate for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to
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the Dedicated Highway and Bridge Trust Fund; the second would reduce fees for
motor vehicle registrations, which would further lower receipts by $49 million.
The underlying growth of receipts in this category is projected at 4 percent,
after adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 million to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
1998-99, the General Fund GAAP Financial Plan shows total revenues of $34.68
billion, total expenditures of $35.94 billion, and net other financing sources
and uses of $42 million.
Since the preparation of the 1998-2001 Financial Plan, the State has
adopted its budget for the 1997-1998 fiscal year. The State budget enacted a
smaller sales tax reduction than the tax reduction program assumed by the City
in the financial plan, which will increase projected City sales tax revenues;
provided for State aid to the City which was less than assumed in the financial
plan; and enacted a State funded tax relief program which begins a year later
than reflected in the financial plan. In addition, the net effect of tax law
changes made in the Federal Balanced Budget Act of 1997 is expected to increase
tax revenues in the 1998 fiscal year.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1997 fiscal year, there can be no assurance that the gap-closing actions
proposed in the 1998-2001 Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax
increases and reductions in essential City services could adversely affect the
City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based
on various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market; wage increases for City employees
consistent with those assumed in the 1998-2001 Financial Plan; employment
growth; the ability to implement proposed reductions in City personnel and other
cost reduction initiatives; the ability of the Health and Hospitals Corporation
and the BOE to take actions to offset reduced revenues; the ability to complete
revenue generating transactions; provision of State and Federal aid and
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<PAGE>
mandate relief and the impact on City revenues and expenditures of Federal and
State welfare reform; and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was
created as part of the City's effort to assist in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a
declaratory judgment declaring the legislation establishing the Transitional
Finance Authority to be unconstitutional. If such legislation were voided,
projected contracts for the City capital projects would exceed the City's debt
limit during fiscal year 1997-98. Future developments concerning the City or
entities issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's current financial plan projects
$2.4 billion of seasonal financing for the 1998 fiscal year, the City expects to
undertake only approximately $1.4 billion of seasonal financing. The City
issued $2.4 billion of short-term obligations in fiscal year 1997. Seasonal
financing requirements for the 1996 fiscal year increased to $2.4 billion from
$2.2 billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
1997-98 fiscal year.
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<PAGE>
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken
by the State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking Federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share in more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million
will be dispersed among all cities, towns and villages, a 3.97% increase in
General Purpose State Aid.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1995, the total indebtedness of all
localities in New York State other than New York City was approximately $19
billion. A small portion (approximately $102.3 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
From time to time, Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and accordingly
might impose substantially increased expenditure requirements on affected
localities. If New York State, New York City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within New York State could be adversely affected. Localities also
face anticipated and potential problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Long-range
potential problems of declining urban population, increasing expenditures and
other economic trends could adversely affect localities and require increasing
New York State assistance in the future.
Additional Investment Limitations
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In addition to the investment limitations set forth in the Prospectus,
the Fund is subject to the investment limitations enumerated below, which may be
changed only by a vote of
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the holders of a majority of the Fund's outstanding Shares (as defined under
"Miscellaneous" in the Prospectus).
The Fund may not:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that purchase by the Fund of
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be underwriting;
2. Purchase or sell real estate, except that the Fund may invest in
securities secured by real estate or interests therein;
3. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or other mineral exploration or development programs;
4. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and
5. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations.
In addition, the Fund is subject to the following non-fundamental
limitations, which may be changed without the vote of shareholders. The Fund
may not:
1. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that the Fund may obtain short-term credit as
may be necessary for the clearance of portfolio transactions;
2. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act;
3. Invest in companies for the purpose of exercising management or
control; and
4. Invest more than 10% of its net assets in illiquid securities.
* * *
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of the Fund's portfolio securities will not constitute a violation of such
limitation.
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<PAGE>
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
NET ASSET VALUE AND NET INCOME
------------------------------
Excelsior Tax-Exempt Fund uses the amortized cost method of valuation
to value Shares in the Fund. Pursuant to this method, a security is valued at
its cost initially, and thereafter a constant amortization to maturity of any
discount or premium is assumed, regardless of the impact of fluctuating interest
rates on the market value of the security. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the security. The market value of
portfolio securities held by the Fund can be expected to vary inversely with
changes in prevailing interest rates.
The Fund invests only in high-quality instruments and maintains a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a constant net asset value per Share. The Fund will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. Excelsior Tax-Exempt Fund's Board of Directors
has established procedures that are intended to stabilize the net asset value
per Share of the Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Board deems
appropriate, of the extent, if any, to which the net asset value per Share of
the Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Board
of Directors will promptly consider what action, if any, should be initiated.
If the Board of Directors believes that the extent of any deviation from the
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, it will take appropriate
steps to eliminate or reduce, to the extent reasonably practicable, any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming Shares in kind; reducing the number
of the Fund's outstanding Shares without monetary consideration; or utilizing a
net asset value per Share determined by using available market quotations.
Net income of the Fund for dividend purposes consists of (i) interest
accrued and discount earned on the Fund's assets, less (ii) amortization of
market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of Excelsior Tax-Exempt Fund (e.g., administrative, legal, accounting, and
directors' fees) prorated to each portfolio of Excelsior Tax-Exempt Fund on the
basis of its relative net assets.
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<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors, Inc. 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 financial institutions ("Shareholder Organizations"). Shares
are also offered for sale directly to institutional investors and to members of
the general public. Different types of Customer accounts at the Shareholder
Organizations may be used to purchase Shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically
"sweep" a Customer's account not less frequently than weekly and invest amounts
in excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in Shares selected by the Customer. Investors purchasing Shares may
include officers, directors, or employees of the particular Shareholder
Organization.
Excelsior Tax-Exempt Fund has authorized certain brokers to accept on
its behalf purchase, exchange and redemption orders. Such brokers are
authorized to designate other intermediaries to accept purchase, exchange and
redemption orders on behalf of Excelsior Tax-Exempt Fund. Excelsior Tax-Exempt
Fund will be deemed to have received a purchase, exchange or redemption order
when such an authorized broker or designated intermediary accepts the order.
Shares of the Fund are offered for sale at their net asset value per
Share next computed after a purchase order is received in good order by
Excelsior Tax-Exempt Fund's sub-transfer agent or after a purchase order is
accepted by an authorized broker or designated intermediary. Similarly, an
order for the exchange or redemption of Shares will receive the net asset value
per Share next computed after the order is received in good order by Excelsior
Tax-Exempt Fund's sub-transfer agent or after the order is accepted by an
authorized broker or designated intermediary.
As stated in the Prospectus, no sales charge is imposed by Excelsior
Tax-Exempt Fund on purchases of Shares. In addition, no sales load is charged
on the reinvestment of dividends or distributions or in connection with certain
Share exchanges as described in the Prospectus under "Investor Programs--
Exchange Privilege."
As described in the Prospectus, Direct Investors may redeem Shares by
writing a check. Checks to redeem Shares are drawn on Excelsior Tax-Exempt
Fund's account at The Chase Manhattan Bank ("Chase"). Direct Investors will be
subject to the same rules and regulations that Chase applies to checking
accounts and will have the same rights and duties with respect to stop-payment
orders, "stale" checks, unauthorized signatures, collection of deposits,
alterations and unauthorized endorsements as bank checking account customers do
under the New York Uniform Commercial Code. When a check is presented to Chase
for payment, Chase, as the shareholder's agent, will cause the Fund to redeem
sufficient Shares in the shareholder's account to cover the amount of the check.
-21-
<PAGE>
Excelsior Tax-Exempt Fund may suspend the right of redemption or
postpone the date of payment for Shares for more than 7 days during any period
when (a) trading on The New York Stock Exchange (the "Exchange") is restricted
by applicable rules and regulations of the SEC; (b) the Exchange is closed for
other than customary weekend and holiday closings; (c) the SEC has by order
permitted such suspension; or (d) an emergency exists as determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
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 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 certain circumstances, Excelsior Tax-Exempt Fund may, in its
discretion, accept securities as payment for Shares. Securities acquired in
this manner will be limited to securities issued in transactions involving a
bona fide reorganization or statutory merger, or other transactions involving
- ---------
securities that meet the investment objective and policies of the Fund.
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.
-22-
<PAGE>
Prior to participating in a Systematic Withdrawal Plan, the investor
must deposit any outstanding certificates for Shares with Chase Global Funds
Services Company, the Fund's sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of the Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund 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. Customers of Shareholder Organizations may obtain
information on the availability of, and the procedures and fees relating to, the
Systematic Withdrawal Plan directly from their Shareholder Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of any other portfolio of
Excelsior Tax-Exempt Fund or Excelsior Funds, Inc. or for Trust Shares of
Excelsior Institutional Trust. Shares may be exchanged by wire, telephone or
mail and must be made to accounts of identical registration. There is no
exchange fee imposed by Excelsior Tax-Exempt Fund, Excelsior Funds, Inc. or
Excelsior Institutional Trust. In order to prevent abuse of this privilege to
the disadvantage of other shareholders, Excelsior Tax-Exempt Fund, Excelsior
Funds, Inc. and Excelsior Institutional Trust reserve the right to limit the
number of exchange requests of investors to no more than six per year.
Excelsior Tax-Exempt Fund, Excelsior Funds, Inc. and Excelsior Institutional
Trust may modify or terminate the exchange program at any time upon 60 days'
written notice to shareholders, and may reject any exchange request. Customers
of Shareholder Organizations may obtain information on the availability of, and
the procedures and fees relating to, such program directly from their
Shareholder Organizations.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange.
Other Investor Programs
- -----------------------
As described in the Prospectus, Shares of the Fund may be purchased in
connection with the Automatic Investment Program. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, this and other programs directly from their Shareholder
Organizations.
-23-
<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. The
Charter authorizes the Board of Directors 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. Prior to December
28, 1995, Excelsior Tax-Exempt Fund was known as "UST Master Tax-Exempt Funds,
Inc."
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,
shareholders of the Fund 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 Excelsior Tax-
Exempt Fund's aggregate outstanding shares may elect all of Excelsior Tax-Exempt
Fund's directors, regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as Excelsior Tax-Exempt Fund shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical or that the matter does not affect any
interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent public
accountants 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 the Board of Directors,
without shareholder approval (unless otherwise required by applicable law), to:
(a) sell and convey the
-24-
<PAGE>
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 any portfolio 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 its
outstanding Common Stock 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:
-25-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- -------------- -----------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Director of Excelsior Fund
238 June Road President & Treasurer and Excelsior Tax-Exempt Fund (since
Stamford, CT 06903 1995); Trustee of Excelsior Funds and
Age: 67 Excelsior Institutional Trust (since
1995); Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York
(from February 1990 until September
1995); and Chairman, U.S. Trust
Connecticut (from March 1993 to May
1997).
Donald L. Campbell Director Retired; Director of Excelsior Fund
333 East 69th Street and Excelsior Tax-Exempt Fund (since
Apt. 10-H 1984); Director of UST Master
New York, NY 10021 Variable Series, Inc. (from 1994 to
Age: 72 June 1997); Trustee of Excelsior
Institutional Trust (since 1995); and
Director, Royal Life Insurance Co. of
New York (since 1991).
</TABLE>
- --------------------
/1/ This director is considered to be an "interested person" of Excelsior Tax-
Exempt Fund as defined in the 1940 Act.
-26-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- -------------- -----------------------
<S> <C> <C>
Rodman L. Drake Director Director, Excelsior Fund and
Continuation Investments Excelsior Tax-Exempt Fund (since
Group, Inc. 1996); Trustee, Excelsior
1251 Avenue of the Institutional Trust and Excelsior
Americas, 9th Floor Funds (since 1994); Director, Parsons
New York, NY 10020 Brinkerhoff Energy Services Inc.
Age: 55 (since 1996); Director, Parsons
Brinkerhoff, Inc. (engineering firm)
(since 1995); President,
Continuation Investments Group, Inc.
(since 1997); President, Mandrake
Group (investment and consulting
firm) (1994-1997); Director, Hyperion
Total Return Fund, Inc. and four
other funds for which Hyperion
Capital Management, Inc. serves as
investment adviser (since 1991);
Co-Chairman, KMR Power Corporation
(power plants) (from 1993 to 1996);
Director, The Latin America Smaller
Companies Fund, Inc. (since 1993);
Member of Advisory Board, Argentina
Private Equity Fund L.P. (from 1992
to 1996) and Garantia L.P. (Brazil)
(from 1993 to 1996); and Director,
Mueller Industries, Inc. (from 1992
to 1994).
Joseph H. Dugan Director Retired; Director of Excelsior Fund
913 Franklin Lake Road and Excelsior Tax-Exempt Fund (since
Franklin Lakes, NJ 07417 1984); Director of UST Master
Age: 73 Variable Series, Inc. (from 1994 to
June 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior Fund
2320 Cumberland Road and Excelsior Tax-Exempt Fund (since
Charlottesville, VA 1986); Director of UST Master
22901 Variable Series, Inc. (from 1994 to
Age: 77 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- -------------- -----------------------
<S> <C> <C>
W. Wallace McDowell, Jr. Director Director, Excelsior Fund and
c/o Prospect Capital Excelsior Tax-Exempt Fund (since
Corp. 1996); Trustee, Excelsior
43 Arch Street Institutional Trust and Excelsior
Greenwich, CT 06830 Funds (since 1994); Private Investor
Age: 61 (since 1994); Managing Director,
Morgan Lewis Githens & Ahn (from 1991
to 1994); and Director, U.S. Homecare
Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children's
Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and
Jack Morton Productions (since 1987).
Jonathan Piel Director Director, Excelsior Fund and
558 E. 87th Street Excelsior Tax-Exempt Fund (since
New York, New York 10128 1996); Trustee, Excelsior
Age: 59 Institutional Trust and Excelsior
Funds (since 1994); Vice President
and Editor, Scientific American, Inc.
(from 1986 to 1994); Director, Group
for The South Fork, Bridgehampton,
New York (since 1993); and Member,
Advisory Committee, Knight Journalism
Fellowships, Massachusetts Institute
of Technology (since 1984).
Robert A. Robinson Director Director of Excelsior Fund and
Church Pension Fund Excelsior Tax-Exempt Fund (since
800 Second Avenue 1987); Director of UST Master
New York, NY 10017 Variable Series, Inc. (from 1994 to
Age: 72 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
President Emeritus, The Church
Pension Fund and its affiliated
companies (since 1966); Trustee, H.B.
and F.H. Bugher Foundation and
Director of its wholly-owned
subsidiaries--Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1995);
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since
1995).
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- -------------- -----------------------
<S> <C> <C>
Alfred C. Tannachion/1/ Director Retired; Director of Excelsior Fund
6549 Pine Meadows Drive and Excelsior Tax-Exempt Fund (since
Spring Hill, FL 34606 1985); Chairman of the Board of
Age: 72 Excelsior Fund and Excelsior
Tax-Exempt Fund (1991-1997) and
Excelsior Institutional Trust
(1996-1997); President and Treasurer
of Excelsior Fund and Excelsior
Tax-Exempt Fund (1994-1997) and
Excelsior Institutional Trust
(1996-1997); Chairman of the Board,
President and Treasurer of UST Master
Variable Series, Inc. (1994-1997);
and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 55
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 39
Edward Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Global Funds Services Company
Services Company (November 1996 to present); and
73 Tremont Street Officer and Manager of Financial
Boston, MA 02108-3913 Reporting, Investors Bank & Trust
Age: 37 Company (January 1991 to November
1996).
</TABLE>
- ------------------------
/1/ This director is considered to be an "interested person" of Excelsior Tax-
Exempt Fund as defined in the 1940 Act.
-29-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- -------------- -----------------------
<S> <C> <C>
John M. Corcoran Assistant Treasurer Vice President, Director of Fund
Chase Global Funds Administration, Chase Global Funds
Services Company Services Company (since April 1998);
73 Tremont Street Vice President, Senior Manager of
Boston, MA 02108-3913 Fund Administration, Chase Global
Age: 33 Funds Services Company (from July
1996 to April 1998); Second Vice
President, Manager of Fund
Administration, Chase Global Funds
Services Company (from October 1993
to July 1996); and Audit Manager,
Ernst & Young LLP (from August 1987
to September 1993).
</TABLE>
Each director of Excelsior Tax-Exempt Fund receives an annual fee of
$9,000 plus a meeting fee of $1,500 for each meeting attended and is reimbursed
for expenses incurred in attending meetings. The Chairman of the Board is
entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to Excelsior Tax-Exempt Fund. The
employees of Chase Global Funds Services Company do not receive any compensation
from Excelsior Tax-Exempt Fund for acting as officers of Excelsior Tax-Exempt
Fund. No person who is currently an officer, director or employee of the
Investment Adviser serves as an officer, director or employee of Excelsior Tax-
Exempt Fund. As of July 8, 1998, the directors and officers of Excelsior Tax-
Exempt Fund as a group owned beneficially less than 1% of the outstanding shares
of each fund of Excelsior Tax-Exempt Fund, and less than 1% of the outstanding
shares of all funds of Excelsior Tax-Exempt Fund in the aggregate.
The following chart provides certain information about the fees
received by Excelsior Tax-Exempt Fund's directors in the most recently completed
fiscal year.
-30-
<PAGE>
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Excelsior Tax-
Aggregate Accrued as Exempt Fund
Compensation from Part of and Fund
Name of Excelsior Tax- Fund Complex* Paid
Person/Position Exempt Fund Expenses to Directors
- -------------------------- ----------------- ---------- -------------------
<S> <C> <C> <C>
Donald L. Campbell $15,000 None $38,000 (3)**
Director
Rodman L. Drake $13,500 None $39,500 (4)**
Director
Joseph H. Dugan $15,000 None $38,000 (3)**
Director
Wolfe J. Frankl $15,000 None $36,500 (3)**
Director
W. Wallace McDowell, Jr. $13,500 None $38,000 (4)**
Director
Jonathan Piel $15,000 None $43,000 (4)**
Director
Robert A. Robinson $15,000 None $38,000 (3)**
Director
Alfred C. Tannachion $15,000 None $38,000 (3)**
Director
Frederick S. Wonham $20,000 None $53,000 (4)**
Chairman of the Board,
President and Treasurer
</TABLE>
- ---------------------------
* The "Fund Complex" consists of Excelsior Funds, Inc., Excelsior Tax-
Exempt Fund, Excelsior Funds and Excelsior Institutional Trust.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
-31-
<PAGE>
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively
with U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as
Investment Adviser to the Fund. In the Investment Advisory Agreement, U.S.
Trust has agreed to provide the services described in the Prospectus. The
Investment Adviser has also agreed to pay all expenses incurred by it in
connection with its activities under the Agreement other than the cost of
securities, including brokerage commissions, if any, purchased for the Fund.
The Investment Advisory Agreement provides that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of such Agreement,
except that the Investment Adviser shall be jointly, but not severally, liable
for a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder. In addition, the Investment Adviser has undertaken
in the Investment Advisory Agreement to maintain its policy and practice of
conducting its Asset Management Group independently of its Banking Group.
Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services (an affiliate of the Distributor) and U.S. Trust
Connecticut (collectively, the "Administrators") 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, if any, of the Fund. The Administrators prepare semiannual reports to
the SEC, prepare Federal and state tax returns, prepare filings with state
securities commissions, arrange for and bear the cost of processing Share
purchase and redemption orders, maintain the Fund's financial accounts and
records, and generally assist in the Fund's operations.
Shareholder Organizations
- -------------------------
As stated in the Prospectus, Excelsior Tax-Exempt Fund has entered
into agreements with Shareholder Organizations. Such agreements require the
Shareholder Organizations to provide shareholder administrative services to
their Customers who beneficially own Shares in consideration for the Fund's
payment of not more than the annual rate of 0.40% of the average daily net
assets of the Fund's Shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recordholder of Shares;
(b) assisting in processing purchase, exchange and redemption transactions; (c)
providing periodic statements showing a Customer's account balances and
confirmations of transactions by the Customer; (d) providing tax and dividend
information to shareholders as appropriate; (e) transmitting proxy statements,
annual reports, updated prospectuses and other communications
-32-
<PAGE>
from Excelsior Tax-Exempt Fund to Customers; and (f) providing or arranging for
the provision of other related services.
Excelsior Tax-Exempt Fund's agreements with Shareholder 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 Shareholder
Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of 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 Shareholder Organizations must be approved by a majority of Excelsior Tax-
Exempt Fund's Board of Directors (including a majority of the Disinterested
Directors). So long as Excelsior Tax-Exempt Fund's arrangements with
Shareholder Organizations are in effect, the selection and nomination of the
members of Excelsior Tax-Exempt Fund's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of Excelsior Tax-Exempt Fund
will be committed to the discretion of such Disinterested Directors.
Expenses
- --------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Fund bears the expenses incurred in its operations. Such
expenses include: taxes; interest; fees (including 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.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase") serves as custodian of the Fund's
assets. Under the Custodian Agreement, Chase has agreed to: (i) maintain a
separate account or accounts in the name of the Fund; (ii) make receipts and
disbursements of money on behalf of the Fund; (iii) collect and receive all
income and other payments and distributions on account of the Fund's portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic
-33-
<PAGE>
reports to Excelsior Tax-Exempt Fund's Board of Directors concerning the Fund's
operations. Chase may, at its own expense, open and maintain custody accounts
with respect to the Fund with other banks or trust companies, provided that
Chase shall remain liable for the performance of all its custodial duties under
the Custodian Agreement, notwithstanding any delegation.
U.S. Trust New York serves as the Fund's transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem Shares; (ii) address and mail all communications by the 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's Board of Directors concerning the Fund's operations. For its transfer
agency, dividend disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. For the services
provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum
per account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from Excelsior Tax-Exempt Fund for any of its sub-transfer agency
services. U.S. Trust New York may, from time to time, enter into sub-transfer
agency arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of 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 all portfolio
securities of the Fund.
The Fund does not intend to seek profits from short-term trading. Its
annual portfolio turnover will be relatively high, but brokerage commissions are
not normally paid on money market instruments, and portfolio turnover is not
expected to have a material effect on the net income of the Fund.
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
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<PAGE>
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 the dealers who make a market in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere.
The Investment Advisory Agreement between Excelsior Tax-Exempt Fund
and the Investment Adviser provides that, in executing portfolio transactions
and selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment Adviser shall
consider factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and whether such broker or dealer is selling
shares of Excelsior Tax-Exempt Fund, and the reasonableness of the commission,
if any, for the specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreement authorizes the
Investment Adviser, to the extent permitted by law and subject to the review of
Excelsior Tax-Exempt Fund's Board of Directors from time to time with respect to
the extent and continuation of the policy, to cause the Fund to pay a broker
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker for effecting the same transaction,
provided that the Investment Adviser determines in good faith that such
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the overall responsibilities of the Investment Adviser to the
accounts as to which it exercises investment discretion. Such brokerage and
research services might consist of reports and statistics on specific companies
or industries, general summaries of groups of stocks and their comparative
earnings, or broad overviews of the stock market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fees payable by the Fund. Such
information may be useful to the Investment Adviser in serving the Fund and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Fund.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Distributor, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the SEC.
Investment decisions for the Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the
-35-
<PAGE>
Investment Adviser believes to be equitable to the Fund and such other
investment company or common trust fund. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained by the Fund. To the extent permitted by law, the
Investment Adviser may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for other investment companies or common
trust funds in order to obtain best execution.
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 LLP (of which Mr. McConnel, Secretary of
Excelsior Tax-Exempt Fund, and Mr. Malloy, Assistant Secretary of Excelsior Tax-
Exempt Fund, are partners), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, is counsel to Excelsior Tax-Exempt
Fund, and will pass upon the legality of the Shares offered by the Prospectus.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
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 intends 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 (whether
or not derived from interest on Municipal Securities) would be taxable as
ordinary income to shareholders to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount 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.
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<PAGE>
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to shareholders who have failed
to provide a correct tax identification number in the manner required, who are
subject to withholding by the Internal Revenue Service for failure properly to
include on their return payments of taxable interest or dividends, or who have
failed to certify to the Fund when required to do so either that they are not
subject to backup withholding or that they are "exempt recipients."
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
would not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional benefit from
the Fund's dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Fund
may not be an appropriate investment for entities which are "substantial users"
of facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under the Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S Corporation and its shareholders.
In order for the Fund to pay exempt-interest dividends for any taxable
year, at least 50% of the aggregate value of the Fund's portfolio must consist
of exempt-interest obligations at the close of each quarter of its taxable year.
Within 60 days after the close of the taxable year, the Fund will notify its
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by the Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code received
by the Fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as exempt-
interest dividends will be the same for all shareholders receiving dividends
from the Fund for such year.
Interest on indebtedness incurred by a shareholder to purchase or
carry the Fund's Shares generally is not deductible for Federal income tax
purposes.
The Fund intends to distribute to shareholders any investment company
taxable income earned by the Fund for each taxable year. In general, the Fund's
investment company taxable income will be its taxable income (including taxable
interest and short-term capital gains) subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year over
the net short-term capital loss, if any, for such year. Such distributions
-37-
<PAGE>
will be taxable to the shareholders as ordinary income (whether paid in cash or
additional Shares).
* * *
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
YIELD INFORMATION
-----------------
The standardized annualized seven-day yields for the Shares of the
Fund are computed separately by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the Fund having
a balance of one Share at the beginning of the period, dividing the net change
in account value by the value of the account at the beginning of the period to
obtain the base period return, and multiplying the base period return by
(365/7). The net change in the value of an account in the Fund includes the
value of additional Shares purchased with dividends from the original Share and
dividends declared on both the original Share and any such additional Shares,
net of all fees that are charged to all shareholder accounts and to the
particular series of Shares in proportion to the length of the base period,
other than nonrecurring account or any sales charges. For any account fees that
vary with the size of the account, the amount of fees charged is computed with
respect to the Fund's mean (or median) account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. In addition, the Fund may use effective compound yield quotations
for its Shares computed by adding 1 to the unannualized base period return
(calculated as described above), raising the sums to a power equal to 365
divided by 7, and subtracting 1 from the results.
The "tax-equivalent" yield of the Fund is computed by: (a) dividing
the portion of the yield (calculated as above) that is exempt from both Federal
and New York State income taxes by one minus a stated combined Federal and New
York State income tax rate; (b) dividing the portion of the yield (calculated as
above) that is exempt from Federal income tax only by one minus a stated Federal
income tax rate; and (c) adding the figures resulting from (a) and (b) above to
that portion, if any, of the yield that is not exempt from Federal income tax.
Tax-equivalent yields assume a marginal Federal income tax rate of 28%, a New
York State and New York City marginal income tax rate of 10.25% and an overall
tax rate taking into account the Federal tax deduction for state and local taxes
paid of 35.38%.
From time to time, in advertisements, sales literature or in reports
to shareholders, the yields of the Fund's Shares may be quoted and compared to
those of other mutual funds with similar investment objectives and to stock or
other relevant indices. For example, the yield of the Fund's Shares may be
compared to the Donoghue's Money Fund average, which is an average compiled by
Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
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<PAGE>
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
Advertisements, sales literature or reports to shareholders may from time to
time also include a discussion and analysis of the Fund's performance, including
without limitation, those factors, strategies and techniques that, together with
market conditions and events, materially affected the Fund's performance.
The current yields for the Fund's Shares may be obtained by calling
(800) 446-1012.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to the Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of Excelsior Tax-Exempt Fund not belonging to a particular portfolio of
Excelsior Tax-Exempt Fund. In determining the net asset value of the Fund's
Shares, assets belonging to the Fund are charged with the direct liabilities of
the Fund 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.
-39-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually debt obligations not having an original maturity in
excess of one year, unless
A-1
<PAGE>
explicitly noted. The following summarizes the rating categories used by Moody's
for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
A-2
<PAGE>
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
A-3
<PAGE>
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
A-4
<PAGE>
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation 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 or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - 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 likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
A-5
<PAGE>
"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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in 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.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
A-6
<PAGE>
"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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
A-7
<PAGE>
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
A-8
<PAGE>
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-9
<PAGE>
CROSS-REFERENCE SHEET
---------------------
EXCELSIOR TAX-EXEMPT FUNDS, INC.
(Short-Term Tax-Exempt Securities,
Intermediate-Term Tax-Exempt,
Long-Term Tax-Exempt, New York
Intermediate-Term Tax-Exempt and
California Tax-Exempt Income Funds)
Form N-1A, Part A, Item Prospectus Caption
- ----------------------- ------------------
1. Cover Page............................... Cover Page
2. Synopsis................................. Expense Summary
3. Condensed Financial Information.......... Financial Highlights; Performance
and Yield Information
4. General Description of Registrant........ Prospectus Summary; Investment
Objectives and Policies; Portfolio
Instruments and Other Investment
Information; Investment
Limitations; Description of
Capital Stock
5. Management of the Fund................... Management of the Funds; Custodian
and Transfer Agent
5A. Management's Discussion of Fund
Performance.............................. Not Applicable
6. Capital Stock and
Other Securities........................ How to Purchase and Redeem
Shares; Dividends and
Distributions; Taxes; Description
of Capital Stock; Miscellaneous
7. Purchase of Securities
Being Offered.......................... Pricing of Shares; How to
Purchase and Redeem Shares;
Investor Programs
8. Redemption or Repurchase.................. How to Purchase and Redeem Shares
9. Pending Legal Proceedings................. Not Applicable
<PAGE>
LOGO
EXCELSIOR
TAX-EXEMPT FUNDS INC.
Excelsior Tax-Exempt Funds
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
This Prospectus describes five separate portfolios offered to investors by Ex-
celsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund"), an open-end man-
agement investment company. Each portfolio (individually, a "Fund" and collec-
tively, the "Funds") has its own investment objective and policies as follows:
SHORT-TERM TAX-EXEMPT SECURITIES FUND is a diversified portfolio whose in-
vestment objective is to seek as high a level of current interest income ex-
empt from Federal income taxes as is consistent with relative stability of
principal. The Fund (hereinafter referred to as the "Short-Term Fund") will
invest substantially all of its assets in Municipal Obligations (as defined
below) and will ordinarily have a dollar-weighted average portfolio maturity
of one to three years.
INTERMEDIATE-TERM TAX-EXEMPT FUND is a diversified portfolio whose invest-
ment objective is to seek as high a level of current interest income exempt
from Federal income taxes as is consistent with relative stability of princi-
pal. The Fund (hereinafter referred to as the "Intermediate-Term Fund") will
invest substantially all of its assets in Municipal Obligations and will ordi-
narily have a dollar-weighted average portfolio maturity of three to ten
years.
LONG-TERM TAX-EXEMPT FUND is a diversified portfolio whose investment objec-
tive is to seek to maximize current interest income exempt from Federal income
taxes. This objective will be realized over time with a view toward relative
stability of principal and preservation of capital. The Fund (hereinafter re-
ferred to as the "Long-Term Fund") will invest substantially all of its assets
in Municipal Obligations and will generally have a dollar-weighted average
portfolio maturity of 10 to 30 years.
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND is a non-diversified portfolio
whose investment objective is to provide New York investors with as high a
level of current interest income exempt from Federal income tax and, to the
extent possible, from New York State and New York City personal income taxes,
as is consistent with relative stability of principal. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in New
York Municipal Obligations (as defined below). Although the Fund (hereinafter
referred to as the "New York Fund") has no restrictions as to the minimum or
maximum maturity of any individual security it may hold, it will have a dol-
lar-weighted average portfolio maturity of 3 to 10 years.
CALIFORNIA TAX-EXEMPT INCOME FUND is a non-diversified portfolio whose in-
vestment objective is to provide California investors with as high a level of
current interest income exempt from Federal income tax and, to the extent pos-
sible, from California state personal income tax as is consistent with rela-
tive 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 (hereinafter referred to as the "Cali-
fornia 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 av-
erage portfolio maturity of 3 to 10 years.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1998 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Excelsior Tax-Exempt Fund at the address shown above or
by calling (800) 446-1012. The Statement of Additional Information, as it may
be supplemented from time to time, is incorporated by reference in its en-
tirety into this Prospectus. The Securities and Exchange Commission maintains
a World Wide Web site (http://www.sec.gov) that contains the Statement of Ad-
ditional Information and other information regarding Excelsior Tax-Exempt
Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1998
<PAGE>
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York and U.S. Trust Company of
Connecticut (collectively, the "Investment Adviser" or "U.S. Trust"). U.S.
Trust Company, N.A. (the "Sub-Adviser") serves as the California Fund's sub-ad-
viser.
SHARES IN THE FUNDS ("SHARES") ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, U.S. TRUST, 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 FUNDS IN-
VOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
2
<PAGE>
PROSPECTUS SUMMARY
EXCELSIOR TAX-EXEMPT FUNDS, INC. is an investment company offering various
investment portfolios with differing objectives and policies. Founded in 1984,
Excelsior Tax-Exempt Fund currently offers seven Funds with combined assets of
approximately $2.1 billion. See "Description of Capital Stock."
INVESTMENT ADVISER: United States Trust Company of New York and U.S. Trust
Company of Connecticut (collectively, "U.S. Trust" or the "Investment Advis-
er") serve as the Funds' investment adviser. U.S. Trust offers a variety of
specialized financial and fiduciary services to high-net worth individuals,
institutions and corporations. Excelsior Tax-Exempt Fund offers investors ac-
cess to U.S. Trust's services. See "Management of the Funds--Investment Advis-
er."
INVESTMENT OBJECTIVES AND POLICIES: Generally, each of the Short-Term, In-
termediate-Term and Long-Term Funds is a diversified investment portfolio
which invests principally in debt obligations exempt from Federal income tax
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their authorities, agencies, instrumen-
talities and political subdivisions. The New York Fund is a non-diversified
portfolio which invests principally in debt obligations exempt from Federal
income tax and, to the extent possible, from New York State and New York City
personal income taxes. The California Fund is a non-diversified portfolio
which invests principally in debt obligations exempt from Federal income tax
and, to the extent possible, from California state personal income taxes. The
Funds' investment objectives and policies are summarized on the cover and ex-
plained in greater detail later in this Prospectus. See "Investment Objectives
and Policies," "Portfolio Instruments and Other Investment Information" and
"Investment Limitations."
HOW TO INVEST: The Funds' Shares are offered at their net asset value. Ex-
celsior Tax-Exempt Fund does not impose a sales load on purchases of Shares.
See "How to Purchase and Redeem Shares."
The minimum to start an account is $500 per Fund, with a minimum of $50 per
Fund for subsequent investments. The easiest way to invest is to complete the
account application which accompanies this Prospectus and to send it with a
check to the address noted on the application. Investors may also invest by
wire and through investment dealers or institutional investors with appropri-
ate sales agreements with Excelsior Tax-Exempt Fund. See "How to Purchase and
Redeem Shares."
HOW TO REDEEM: Redemptions may be requested directly from Excelsior Tax-Ex-
empt Fund by mail, wire or telephone. Investors investing through another in-
stitution should request redemptions through their Shareholder Organization.
See "How to Purchase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Since the Funds invest in bonds and
other fixed-income securities, they will be affected directly by credit mar-
kets and fluctuations in interest rates. The prices of fixed-income securities
generally fluctuate inversely with changes in interest rates. Although each
Fund generally seeks to invest for the long term, each Fund may engage in
short-term trading of portfolio securities. A high rate of portfolio turnover
may involve correspondingly greater transaction costs which must be borne di-
rectly by a Fund and ultimately by its shareholders. The New York and Califor-
nia Funds are non-diversified; therefore, each Fund's investment return may at
times be dependent upon the performance of a smaller number of securities rel-
ative to the number of securities held in a diversified portfolio. Investment
in the Funds should not be considered a complete investment program. See "In-
vestment Objectives and Policies" and "Portfolio Instruments and Other Infor-
mation."
3
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHORT-TERM INTERMEDIATE- LONG-TERM NEW YORK CALIFORNIA
FUND TERM FUND FUND FUND FUND
---------- ------------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Load.... None None None None None
Sales Load on Reinvested
Dividends.............. None None None None None
Deferred Sales Load..... None None None None None
Redemption Fees......... None None None None None
Exchange Fees........... None None None None None
ANNUAL FUND OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)/1/............ 0.24% 0.29% 0.43% 0.47% 0.00%
12b-1 Fees.............. None None None None None
Other Operating Expenses
Administrative
Servicing Fee/1/..... 0.06% 0.06% 0.07% 0.03% 0.35%
Other Expenses........ 0.29% 0.23% 0.24% 0.21% 0.15%/1/
----- ----- ----- ----- -----
Total Operating Expenses
(after fee waivers)/1/. 0.59% 0.58% 0.74% 0.71% 0.50%
===== ===== ===== ===== =====
</TABLE>
- --------
1. The Investment Adviser and administrators may from time to time voluntarily
waive part of their respective fees, which may be terminated at any time.
Until further notice, the Investment Adviser and/or administrators intend
to voluntarily waive fees in an amount equal to the Administrative Servic-
ing Fee, and to further waive fees and reimburse expenses to the extent
necessary for the Short-Term and California Funds to maintain an annual ex-
pense ratio of not more than 0.60% and 0.50%, respectively. Without such
fee waivers and expense reimbursements: "Advisory Fees" would be 0.30%,
0.35%, 0.50%, 0.50% and 0.50% for the Short-Term, Intermediate-Term, Long-
Term, New York and California Funds, respectively; "Other Expenses" would
be 0.39% for the California Fund; and "Total Operating Expenses" would be
0.65%, 0.64%, 0.81%, 0.74% and 1.24% for the Short-Term, Intermediate-Term,
Long-Term, New York and California Funds, respectively.
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual returns and (2) redemption of your investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term Fund................................. $ 6 $19 $33 $74
Intermediate-Term Fund.......................... 6 19 32 73
Long-Term Fund.................................. 8 24 41 92
New York Fund................................... 7 23 40 88
California Fund................................. 5 16 28 63
</TABLE>
The foregoing expense summary and example are intended to assist the in-
vestor in understanding the costs and expenses that an investor in Shares of
the Funds will bear directly or indirectly. The expense summary sets forth ad-
visory and other expenses payable with respect to Shares of the Funds for the
fiscal year ended March 31, 1998. For more complete descriptions of the Funds'
operating expenses, see "Management of the Funds" in this Prospectus and the
financial statements and notes incorporated by reference in the Statement of
Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Share outstanding throughout
each period and other performance information derived from the financial state-
ments included in Excelsior Tax-Exempt Fund's Annual Report to Shareholders for
the fiscal year ended March 31, 1998 (the "Financial Statements"). The informa-
tion contained in the Financial Highlights for each period has been audited by
Ernst & Young LLP, Excelsior Tax-Exempt Fund's independent auditors. The fol-
lowing tables should be read in conjunction with the Financial Statements and
notes thereto. More information about the performance of each Fund is also con-
tained in the Annual Report to Shareholders which may be obtained from Excel-
sior Tax-Exempt Fund without charge by calling the number on the front cover of
this Prospectus.
SHORT-TERM TAX-EXEMPT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------ PERIOD ENDED
1998 1997 1996 1995 1994 MARCH 31, 1993/1/
------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 7.03 $ 7.05 $ 6.96 $ 6.99 $ 7.07 $ 7.00
------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income.. 0.27 0.26 0.28 0.25 0.21 0.05
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 0.08 (0.01) 0.09 (0.02) (0.03) 0.07
------ ------ ------ ------ ------ ------
Total From Investment
Operations............. 0.35 0.25 0.37 0.23 0.18 0.12
------ ------ ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.27) (0.27) (0.28) (0.25) (0.21) (0.05)
Dividends in Excess of
Net Investment Income. 0.00/4/ 0.00/4/ 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments........... 0.00 0.00 0.00 (0.01) (0.05) 0.00
------ ------ ------ ------ ------ ------
Total Distributions..... (0.27) (0.27) (0.28) (0.26) (0.26) (0.05)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period................. $ 7.11 $ 7.03 $ 7.05 $ 6.96 $ 6.99 $ 7.07
====== ====== ====== ====== ====== ======
Total Return............ 5.01% 3.55% 5.42% 3.45% 2.55% 1.65%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $42.35 $41.08 $42.97 $48.19 $57.73 $28.60
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.59% 0.58% 0.58% 0.59% 0.59% 0.60%/2/
Ratio of Gross
Operating Expenses to
Average Net Assets/3/. 0.65% 0.65% 0.64% 0.61% 0.60% 0.84%/2/
Ratio of Net Income to
Average Net Assets.... 3.76% 3.73% 4.05% 3.60% 2.94% 2.80%/2/
Portfolio Turnover
Rate.................. 58.0% 87.0% 124.0% 565.0% 539.0% 0.0%
</TABLE>
- --------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Annualized.
3. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
4. Amount represents less than $0.01 per share.
5
<PAGE>
INTERMEDIATE-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 9.11 $ 9.12 $ 8.80 $ 8.64 $ 9.24 $ 8.95 $ 8.83 $ 8.67 $ 8.52 $ 8.69
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Income From Investment
Operations
Net Investment Income.. 0.42 0.40 0.40 0.37 0.34 0.42 0.49 0.56 0.57 0.55
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 0.37 0.00 0.32 0.16 (0.09) 0.59 0.19 0.16 0.15 (0.17)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations............. 0.79 0.40 0.72 0.53 0.25 1.01 0.68 0.72 0.72 0.38
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.41) (0.41) (0.40) (0.37) (0.34) (0.42) (0.49) (0.56) (0.57) (0.55)
Dividends in Excess of
Net Investment Income. 0.00 0.00/2/ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments........... (0.01) 0.00 0.00 0.00 (0.26) (0.30) (0.07) 0.00 0.00 0.00
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00 0.00 0.00 0.00 (0.25) 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions..... (0.42) (0.41) (0.40) (0.37) (0.85) (0.72) (0.56) (0.56) (0.57) (0.55)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net Asset Value, End of
Year................... $ 9.48 $ 9.11 $ 9.12 $ 8.80 $ 8.64 $ 9.24 $ 8.95 $ 8.83 $ 8.67 $ 8.52
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
Total Return............ 8.81% 4.58% 8.30% 6.34% 2.58% 11.70% 7.95% 8.64% 8.58% 4.49%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $271.02 $244.05 $255.18 $234.99 $298.26 $285.32 $223.20 $122.62 $90.73 $58.29
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.58% 0.58% 0.60% 0.61% 0.64% 0.64% 0.64% 0.66% 0.69% 0.68%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/. 0.64% 0.64% 0.65% 0.64% 0.64% 0.64% 0.64% 0.66% 0.69% 0.68%
Ratio of Net Income to
Average Net Assets.... 4.47% 4.56% 4.44% 4.28% 3.74% 4.57% 5.48% 6.47% 6.48% 6.43%
Portfolio Turnover
Rate.................. 30.0% 28.0% 50.0% 362.0% 379.0% 429.0% 276.0% 216.0% 154.0% 256.0%
</TABLE>
- --------
NOTES:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.01 per share.
6
<PAGE>
LONG-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 9.43 $ 9.53 $ 9.27 $ 8.87 $ 9.76 $ 9.25 $ 9.15 $ 8.87 $ 8.80 $ 8.68
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income.. 0.44 0.46 0.47 0.43 0.42 0.46 0.51 0.54 0.55 0.53
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 0.71 0.03 0.39 0.50 (0.12) 0.99 0.30 0.33 0.38 0.32
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations............. 1.15 0.49 0.86 0.93 0.30 1.45 0.81 0.87 0.93 0.85
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.43) (0.46) (0.46) (0.43) (0.42) (0.46) (0.51) (0.54) (0.55) (0.53)
Distributions From Net
Realized Gain on
Investments........... (0.12) (0.13) (0.14) (0.10) (0.50) (0.48) (0.20) (0.05) (0.31) (0.20)
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00/2/ 0.00/2/ 0.00 0.00 (0.27) 0.00 0.00 0.00 0.00 0.00
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions..... (0.55) (0.59) (0.60) (0.53) (1.19) (0.94) (0.71) (0.59) (0.86) (0.73)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Year................... $ 10.03 $ 9.43 $ 9.53 $ 9.27 $ 8.87 $ 9.76 $ 9.25 $ 9.15 $ 8.87 $ 8.80
======= ======= ====== ====== ====== ====== ====== ====== ====== ======
Total Return............ 12.18% 5.47% 9.35% 11.01% 2.38% 16.35% 9.19% 10.11% 10.67% 10.14%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $149.54 $107.93 $91.06 $78.88 $82.15 $85.52 $62.73 $38.04 $36.16 $19.73
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.74% 0.74% 0.77% 0.80% 0.85% 0.86% 0.85% 0.86% 0.92% 0.76%
Ratio of Gross
Operating Expenses to
Average Net Assets/1/. 0.81% 0.81% 0.82% 0.83% 0.86% 0.86% 0.85% 0.86% 0.92% 0.87%
Ratio of Net Income to
Average Net Assets.... 4.40% 4.80% 4.85% 4.86% 4.25% 4.73% 5.52% 6.01% 5.99% 6.14%
Portfolio Turnover
Rate.................. 83.0% 125.0% 185.0% 214.0% 252.0% 300.0% 218.0% 197.0% 437.0% 550.0%
</TABLE>
- --------
NOTES:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
2. Amount represents less than $0.01 per share.
7
<PAGE>
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991/1/
------- ------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 8.45 $ 8.44 $ 8.24 $ 8.18 $ 8.61 $ 8.31 $ 8.20 $ 8.00
------- ------- ------ ------ ------- ------ ------ ------
Income From Investment
Operations
Net Investment Income.. 0.35 0.36 0.35 0.33 0.31 0.34 0.41 0.39
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 0.34 0.01 0.20 0.15 (0.13) 0.41 0.19 0.20
------- ------- ------ ------ ------- ------ ------ ------
Total From Investment
Operations............. 0.69 0.37 0.55 0.48 0.18 0.75 0.60 0.59
------- ------- ------ ------ ------- ------ ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.35) (0.36) (0.35) (0.33) (0.31) (0.34) (0.41) (0.39)
Distributions in Excess
of Net Investment
Income................ 0.00/4/ 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments........... 0.00 0.00 0.00 (0.09) (0.22) (0.11) (0.08) 0.00
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00 0.00 0.00 0.00 (0.08) 0.00 0.00 0.00
------- ------- ------ ------ ------- ------ ------ ------
Total Distributions..... (0.35) (0.36) (0.35) (0.42) (0.61) (0.45) (0.49) (0.39)
------- ------- ------ ------ ------- ------ ------ ------
Net Asset Value, End of
Period................. $ 8.79 $ 8.45 $ 8.44 $ 8.24 $ 8.18 $ 8.61 $ 8.31 $ 8.20
======= ======= ====== ====== ======= ====== ====== ======
Total Return............ 8.35% 4.46% 6.77% 6.05% 1.87% 9.27% 7.42% 7.54%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $131.29 $102.25 $96.41 $87.16 $107.49 $88.25 $52.24 $25.88
Ratio of Net Operating
Expenses to Average
Net Assets............ 0.71% 0.72% 0.75% 0.78% 0.87% 0.89% 0.88% 0.86%/2/
Ratio of Gross
Operating Expenses to
Average Net Assets/3/. 0.74% 0.75% 0.77% 0.80% 0.87% 0.89% 0.88% 0.86%/2/
Ratio of Net Income to
Average Net Assets.... 4.08% 4.25% 4.15% 4.06% 3.55% 3.94% 4.82% 5.72%/2/
Portfolio Turnover
Rate.................. 47.0% 89.0% 154.0% 563.0% 326.0% 339.0% 106.0% 105.0%/2/
</TABLE>
- --------
NOTES
1. Inception date of the Fund was May 31, 1990.
2. Annualized.
3. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
4. Amount represents less than $0.01 per share.
8
<PAGE>
CALIFORNIA TAX-EXEMPT INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
MARCH 31, 1998 MARCH 31, 1997/1/
-------------- -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period.......... $ 6.95 $ 7.00
------ ------
Income From Investment Operations
Net Investment Income....................... 0.28 0.12
Net Gains or (Losses) on Securities (both
realized and unrealized)................... 0.23 (0.05)
------ ------
Total From Investment Operations............ 0.51 0.07
------ ------
Less Distributions
Dividends From Net Investment Income........ (0.28) (0.12)
------ ------
Net Asset Value, End of Period................ $ 7.18 $ 6.95
====== ======
Total Return.................................. 7.42% 2.12%/2/
Ratios/Supplemental Data
Net Assets, End of Period (in millions)..... $32.57 $13.23
Ratio of Net Operating Expenses to Average
Net Assets................................. 0.50% 0.66%/2/
Ratio of Gross Operating Expenses to Average
Net Assets/3/.............................. 1.24% 1.53%/2/
Ratio of Net Income to Average Net Assets... 3.90% 3.69%/2/
Portfolio Turnover Rate..................... 14.0% 7.0%/2/
</TABLE>
- --------
NOTES
1. Inception date of the Fund was October 1, 1996.
2. Annualized.
3. Expense ratio before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
9
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser and Sub-Adviser (collectively, the "Advisers") will
use their best efforts to achieve the investment objective of each Fund, al-
though their achievement cannot be assured. The investment objective of each
of the Short-Term, Intermediate-Term and Long-Term Funds is "fundamental,"
meaning that it may not be changed without a vote of the holders of a majority
of the particular Fund's outstanding Shares (as defined under "Miscellane-
ous"). The investment objective of each of the New York and California Funds
may be changed by Excelsior Tax-Exempt Fund's Board of Directors without
shareholder approval. Except as noted below and in "Investment Limitations,"
the investment policies of each Fund may be changed without the vote of the
holders of a majority of the outstanding Shares of such Fund.
SHORT-TERM FUND
The Short-Term Fund is a diversified portfolio whose investment objective is
to seek as high a level of current interest income exempt from Federal income
taxes as is consistent with relative stability of principal. The Fund will in-
vest substantially all of its assets in debt obligations issued by or on be-
half of states, territories, and possessions of the United States, the Dis-
trict of Columbia and their respective authorities, agencies, instrumentali-
ties, and political subdivisions, the interest from which is, in the opinion
of bond counsel to the issuer, exempt from Federal income tax ("Municipal Ob-
ligations"). Although the Short-Term Fund has no restrictions as to the mini-
mum or maximum maturity of any individual Municipal Obligation, it will gener-
ally have a dollar-weighted average portfolio maturity of one to three years.
INTERMEDIATE-TERM FUND
The Intermediate-Term Fund is a diversified portfolio whose investment ob-
jective is to seek as high a level of current interest income exempt from Fed-
eral income taxes as is consistent with relative stability of principal. The
Fund will invest substantially all of its assets in Municipal Obligations. Al-
though the Fund has no restrictions as to the minimum or maximum maturity of
any individual Municipal Obligation, it will generally have a dollar-weighted
average portfolio maturity of three to ten years.
The Intermediate-Term Fund is designed for investors in relatively high tax
brackets who are seeking greater stability of principal than is generally
available from longer-term Municipal Obligations and who are willing to accept
a somewhat lower yield in order to achieve this stability. Generally, the
price for its Shares will be less volatile than that normally associated with
a portfolio consisting of longer-term Municipal Obligations.
LONG-TERM FUND
The Long-Term Fund is a diversified portfolio whose investment objective is
to seek to maximize current interest income exempt from Federal income taxes.
The Fund will realize this objective over time with a view toward relative
stability of principal and preservation of capital. The Fund will invest sub-
stantially all of its assets in Municipal Obligations with no maturity re-
strictions. While the Fund's dollar-weighted average portfolio maturity may be
as long as 30 years, during temporary defensive periods it could be consider-
ably shorter.
The Long-Term Fund is designed for investors in relatively high tax brackets
who are seeking the highest levels of current tax-free income and who are
willing to accept a somewhat higher price volatility than that normally asso-
ciated with short-term and intermediate-term Municipal Obligations.
10
<PAGE>
NEW YORK FUND
The New York Fund is a non-diversified investment portfolio whose investment
objective is to provide New York investors with as high a level of current in-
terest income exempt from Federal income tax and, to the extent possible, from
New York State and New York City personal income taxes as is consistent with
the preservation of capital and relative stability of principal. To accomplish
this goal, the Fund anticipates that it will invest primarily in New York Mu-
nicipal Obligations as defined below. Although the Fund has no restrictions as
to the minimum or maximum maturity of any individual security that it may hold,
it will have a dollar-weighted average portfolio maturity of 3 to 10 years.
The Fund expects that, except during temporary defensive periods, under nor-
mal market conditions 65% of the Fund's total assets will be invested in debt
securities of the State of New York, its political sub-divisions, authorities,
agencies, instrumentalities and corporations, and certain other governmental
issuers such as Puerto Rico, the interest from which is, in the opinion of bond
counsel to the issuer, exempt from Federal, New York State and New York City
income taxes ("New York Municipal Obligations"). In general, the Fund antici-
pates that dividends derived from interest on Municipal Obligations other than
New York Municipal Obligations will be exempt from regular Federal income tax
but may be subject to New York State and New York City personal income taxes.
See "Taxes" below.
CALIFORNIA FUND
The California Fund is a non-diversified investment portfolio whose invest-
ment objective is to provide California investors with as high a level of cur-
rent interest income exempt from Federal income tax and, to the extent possi-
ble, from California state personal income tax as is consistent with the pres-
ervation of capital and relative stability of principal. To accomplish this
goal, the Fund anticipates that it will invest primarily in California Munici-
pal Obligations as defined 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 conditions it will have a dollar-weighted average portfolio
maturity of 3 to 10 years.
The Fund expects that, except during temporary defensive periods, under nor-
mal market conditions 65% of the Fund's total assets will be invested in debt
securities of the State of California, its political sub-divisions, authori-
ties, agencies, instrumentalities and corporations, and certain other govern-
mental issuers, the interest from which is, in the opinion of bond counsel to
the issuer, exempt from Federal and California personal income taxes ("Califor-
nia Municipal Obligations"). In general, the Fund anticipates that dividends
derived from interest on Municipal Obligations other than California Municipal
Obligations will be exempt from regular Federal income tax but may be subject
to California personal income taxes. Dividends paid by the Fund may be subject
to local taxes regardless of their source. See "Taxes" below.
COMMON INVESTMENT POLICIES
The Funds invest in Municipal Obligations which are determined by the Advis-
ers to present minimal credit risks. As a matter of fundamental policy, except
during temporary defensive periods, each Fund will maintain at least 80% of its
net assets in Municipal Obligations. (This policy may not be changed with re-
spect to a Fund without the vote of the holders of a majority of its outstand-
ing Shares.) However, from time to time on a temporary defensive basis due to
market conditions, each Fund may hold uninvested cash reserves or invest in
taxable obligations in such proportions as, in the opinion of the Advisers,
prevailing market or economic conditions may warrant. Uninvested cash reserves
will not earn income. Should a Fund invest in taxable obligations, it would
purchase: (i) obligations of the U.S. Treasury; (ii) obligations of agencies
and instrumentalities of the U.S. Government; (iii) money market instruments
such as certificates of deposit, commercial paper, and bankers' acceptances;
(iv) repurchase agreements collateralized by U.S. Government obligations or
other money market instruments; (v) municipal bond index and interest rate
futures contracts; or (vi) securities issued by other investment companies that
invest in high quality, short-term securities.
11
<PAGE>
In seeking to achieve its investment objective, each Fund may invest in
"private activity bonds" (see "Types of Municipal Obligations" below), the in-
terest on which is treated as a specific tax preference item under the Federal
alternative minimum tax. Investments in such securities, however, will not ex-
ceed under normal market conditions 20% of each Fund's total assets when added
together with any taxable investments held by that Fund.
The Municipal Obligations purchased by the Funds will consist of: (1) bonds
rated "BBB" or higher by Standard & Poor's Ratings Services ("S&P") or by
Fitch IBCA ("Fitch"), or "Baa" or higher by Moody's Investors Service, Inc.
("Moody's"), or, in certain instances, bonds with lower ratings if they are
determined by the Advisers to be comparable to BBB/Baa-rated issues; (2) notes
rated "MIG-3" or higher ("VMIG-3" or higher in the case of variable rate
notes) by Moody's, or "SP-3" or higher by S&P, or "F3" or higher by Fitch; and
(3) commercial paper rated "Prime-3" or higher by Moody's, or "A-3" or higher
by S&P, or "F3" or higher by Fitch. Securities rated "BBB" by S&P and Fitch or
"Baa" by Moody's are generally considered to be investment grade, although
they have speculative characteristics and are more sensitive to economic
change than higher rated securities. If not rated, securities purchased by the
Funds will be of comparable quality to the above ratings as determined by the
Advisers under the supervision of the Board of Directors. A discussion of
Moody's, Fitch's and S&P's rating categories is contained in Appendix A to the
Statement of Additional Information.
Although the Funds do not presently intend to do so on a regular basis, they
may invest more than 25% of their assets in Municipal Obligations the interest
on which is paid solely from revenues of similar projects, if such investment
is deemed necessary or appropriate by the Advisers. To the extent that a
Fund's assets are concentrated in Municipal Obligations payable from revenues
on similar projects, the Fund will be subject to the peculiar risks presented
by such projects to a greater extent than it would be if the Fund's assets
were not so concentrated.
SPECIAL RISK FACTORS APPLICABLE TO THE NEW YORK AND CALIFORNIA FUNDS
General. The New York and California Funds intend to follow the diversifica-
tion standards set forth in the 1940 Act except to the extent the Advisers de-
termine that non-diversification is appropriate in order to maximize the per-
centage of each Fund's assets that are New York or California Municipal Obli-
gations, respectively. The investment return on a non-diversified portfolio
typically is dependent upon the performance of a smaller number of securities
relative to the number of securities held in a diversified portfolio. A 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.
New York Fund. The New York Fund's ability to achieve its investment objec-
tive is dependent upon the ability of the issuers of New York Municipal Obli-
gations to meet their continuing obligations for the payment of principal and
interest. New York State and New York City face long-term economic problems
that could seriously affect their ability and that of other issuers of New
York Municipal Obligations to meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including is-
suers whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times jeop-
ardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by
S&P and Moody's, the most recent actions of S&P and Moody's have been to place
the debt obligations of New York State on CreditWatch with positive implica-
tions and to upgrade the debt obligations of New York City, respectively.
Strong demand for New York Municipal Obligations has also at times had the ef-
fect of permitting New York Municipal Obligations to be issued with yields
relatively lower, and
12
<PAGE>
after issuance, to trade in the market at prices relatively higher, than com-
parably rated municipal obligations issued by other jurisdictions. A recur-
rence of the financial difficulties previously experienced by certain issuers
of New York Municipal Obligations could result in defaults or declines in the
market values of those issuers' existing obligations and, possibly, in the ob-
ligations of other issuers of New York Municipal Obligations. Although as of
the date of this Prospectus, no issuers of New York Municipal Obligations are
in default with respect to the payment of their municipal obligations, the oc-
currence of any such default could affect adversely the market values and mar-
ketability of all New York Municipal Obligations and, consequently, the net
asset value of the Fund's portfolio.
Other considerations affecting the New York Fund's investments in New York
Municipal Obligations are summarized in the Statement of Additional Informa-
tion.
California Fund. The California Fund's concentration in California Municipal
Obligations involves certain risks. Payment of the interest and principal of
California Municipal Obligations depends on the continuing ability of their
issuers to meet their obligations thereunder. Investors should consider the
greater risk inherent in the Fund's concentration in California Municipal Ob-
ligations 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 before making an investment decision.
Many of the California Fund's California Municipal Obligations are likely to
be obligations 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 resulted in
a substantial reduction in state revenues. Decreased state revenues may result
in reductions in allocations of state revenues to local governments.
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.
Although economic factors such as declines in tourism and reductions in de-
fense spending had an adverse impact on the California economy in the early
1990's, the economy has recently out-performed that of the nation through em-
ployment growth, unemployment decline and increases in personal income, as
well as an anticipated budget surplus for California in Fiscal Year 1997-98.
With approximately half of California's exports being sold in Asia, financial
problems in that region have had a slight dampening effect on the California
economy. However, strong export growth to Mexico has offset some of the weak-
ness in Asia.
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. Settlement discussions involving a num-
ber of the defendants have occurred and some agreemenets in principle have
been reached. However, until any such agreements become final and any remain-
ing litigation is resolved, it is impossible to determine the ultimate impact
on these issuers of the bankruptcy and its aftermath.
13
<PAGE>
Other considerations affecting the California Fund's investments in Califor-
nia Municipal Obligations are summarized in the Statement of Additional Infor-
mation.
The value of securities in the Funds can be expected to vary inversely with
changes in prevailing interest rates. The Funds are not intended to constitute
a complete investment program and are not designed for investors seeking capi-
tal appreciation or maximum tax-exempt income irrespective of fluctuations in
principal.
YEAR 2000
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be affected adversely if the
computer systems used by the Advisers and the Funds' other service providers
do not properly process and calculate date-related information and data from
and after January 1, 2000. This is commonly known as the "Year 2000 Problem."
The Advisers and the Funds' other service providers have informed Excelsior
Tax-Exempt Fund that they are taking steps to address the Year 2000 Problem
with respect to the computer systems that they use. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any ad-
verse impact on the Funds as a result of the Year 2000 Problem.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
TYPES OF MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations which may be held
by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particu-
lar facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as user fees of the
facility being financed. Private activity bonds held by the Funds are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity revenue bonds
is usually directly related to the credit standing of the corporate user of
the facility involved.
The Funds' portfolios may also include "moral obligation" securities, which
are usually issued by public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current reve-
nues, it may draw on a reserve fund, the restoration of which is a moral com-
mitment, but not a legal obligation of the state or municipality which created
the issuer. There is no limitation on the amount of moral obligation securi-
ties that may be held by the Funds.
The Funds may also purchase custodial receipts evidencing the right to re-
ceive either the principal amount or the periodic interest payments or both
with respect to specific underlying Municipal Obligations. In general, such
"stripped" Municipal Obligations are offered at a substantial discount in 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 Funds intend to purchase "stripped" Municipal Obligations
only when the yield thereon will be, as described above, exempt from Federal
income tax to the same extent as interest on the underlying Municipal Obliga-
tions. "Stripped" Municipal Obligations are considered illiquid securities
subject to the limit described below under "Illiquid Securities." The Short-
Term, Intermediate-Term and Long-Term Funds will limit their investments in
interest-only and principal-only Municipal Obligations to 5% of their total
assets.
14
<PAGE>
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest thereon from Federal income tax (and, with respect to New
York and California Municipal Obligations, to the exemption of interest
thereon from New York State, New York City and California state personal in-
come taxes) are rendered by bond counsel to the respective issuers at the time
of issuance. Neither the Funds nor the Advisers will review the proceedings
relating to the issuance of Municipal Obligations or the bases for such opin-
ions.
FUTURES CONTRACTS
The Funds may purchase and sell municipal bond index and interest rate
futures contracts as a hedge against changes in market conditions. A municipal
bond index assigns values daily to the municipal bonds included in the index
based on the independent assessment of dealer-to-dealer municipal bond bro-
kers. 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 spec-
ified 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 under-
lying securities in the index is made.
The Funds may enter into contracts for the future delivery of fixed-income
securities commonly known as interest rate futures contracts. Interest rate
futures contracts are similar to 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 Funds will not engage in transactions in futures contracts for specula-
tion, but only as a hedge against changes in market values of securities which
they hold or intend to purchase where the transactions are intended to reduce
risks inherent in the management of the Funds. Each Fund may engage in futures
contracts only to the extent permitted by the Commodity Futures Trading Com-
mission ("CFTC") and the Securities and Exchange Commission ("SEC"). As of the
date of this Prospectus, each Fund intends to limit its hedging transactions
in futures contracts so that, immediately after any such transaction, the ag-
gregate 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 prof-
its and unrealized losses on the Fund's open contracts.
When investing in futures contracts, the Funds must satisfy certain asset
segregation requirements to ensure that the use of futures is unleveraged.
When a Fund takes a long position in a futures contract, it must maintain a
segregated account containing liquid assets equal to the purchase price of the
contract, less any margin or deposit. When a Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liq-
uid assets in an amount equal to the market value of the securities underlying
such contract (less any margin or deposit), which amount must be at least
equal to the market price at which the short position was established. Asset
segregation requirements are not applicable when a Fund "covers" a futures po-
sition generally by entering into an offsetting position.
Transactions by a Fund in futures contracts may subject the Fund to a number
of risks. Successful use of futures by a Fund is subject to the ability of the
Advisers to anticipate correctly movements in the direction of the market.
There may be an imperfect correlation, or no correlation at all, between move-
ments in the price of the futures contracts and movements in the price of the
instruments being hedged. In addition, investments in futures may subject a
Fund to losses due to unanticipated market movements which are potentially un-
limited. Further, there is no assurance that a liquid market will exist for
any particular futures contract at any particular time. Consequently, a Fund
may realize a loss on a futures transaction that is not offset by a favorable
movement in the price of securities which it holds or intends to purchase or
may be unable to close a futures position in the event of adverse price move-
ments. Any income from investments in futures contracts will be taxable income
of the Funds.
15
<PAGE>
MONEY MARKET INSTRUMENTS
"Money market instruments" that may be purchased by the Funds in accordance
with their investment objectives and policies stated above include, among
other things, bank obligations, commercial paper and corporate bonds with re-
maining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit, and non-negotiable time deposits earning a specified return and is-
sued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by
a savings and loan association or savings bank which is insured by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. In-
vestments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at the time of purchase.
Investments by the Funds in commercial paper will consist of issues that are
rated "A-3" or better by S&P, or "Prime-3" or better by Moody's, or "F3" or
better by Fitch. In addition, each Fund may acquire unrated commercial paper
that is determined by the Advisers at the time of purchase to be of comparable
quality to rated instruments that may be acquired by the particular Fund.
VARIABLE AND FLOATING RATE INSTRUMENTS
Securities purchased by the Funds may include variable and floating rate in-
struments. The interest rates on such instruments are not fixed and vary with
changes in the particular interest rate benchmarks or indexes. Unrated vari-
able and floating rate instruments will be purchased by the Funds based upon
the Advisers' determination that their quality at the time of purchase is com-
parable to at least the minimum ratings set forth above. In some cases a Fund
may require that the issuer's obligation to pay the principal be backed by an
unconditional and irrevocable bank letter or line of credit, guarantee or com-
mitment to lend. Although there may be no active secondary market with respect
to a particular variable or floating rate instrument purchased by a Fund, the
Fund may (at any time or during specified intervals within a prescribed peri-
od, depending upon the instrument involved) demand payment in full of the
principal and may resell the instrument to a third party. The absence of an
active secondary market, however, could make it difficult for a Fund to dis-
pose of a variable or floating rate instrument in the event the issuer de-
faulted on its payment obligation or during periods when the Fund is not enti-
tled to exercise its demand rights. In such cases, the Fund could suffer a
loss with respect to the instruments.
REPURCHASE AGREEMENTS
As stated above, each Fund may agree to purchase portfolio securities sub-
ject to the seller's agreement to repurchase them at a mutually agreed upon
date and price ("repurchase agreements"). Each Fund will enter into repurchase
agreements only with financial institutions such as banks or broker/dealers
which are deemed to be creditworthy by the Advisers under guidelines approved
by Excelsior Tax-Exempt Fund's Board of Directors. No Fund will enter into re-
purchase agreements with the Advisers or their affiliates. Repurchase agree-
ments with remaining maturities in excess of seven days will be considered il-
liquid securities subject to the 10% limit described below under "Illiquid Se-
curities."
The seller under a repurchase agreement will be required to maintain the
value of the obligations subject to the agreement at not less than the repur-
chase price. Default or bankruptcy of the seller would, however, expose a Fund
to possible delay in connection with the disposition of the underlying securi-
ties or loss to the extent that proceeds from a sale of the underlying securi-
ties were less than the repurchase price under the agreement. Income on repur-
chase agreements will be taxable.
16
<PAGE>
INVESTMENT COMPANY SECURITIES
The Funds may also invest in securities issued by other investment companies
which invest in high-quality, short-term securities and which determine their
net asset value per share based on the amortized cost or penny-rounding method.
In addition to the advisory fees and other expenses a Fund bears directly in
connection with its own operations, as a shareholder of another investment com-
pany, a Fund would bear its pro rata portion of the other investment company's
advisory fees and other expenses. As such, the Fund's shareholders would indi-
rectly bear the expenses of the Fund and the other investment company, some or
all of which would be duplicative. Such securities will be acquired by the
Funds within the limits prescribed by the Investment Company Act of 1940, as
amended (the "1940 Act"), which include, subject to certain exceptions, a pro-
hibition against a Fund investing more than 10% of the value of its total as-
sets in such securities.
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
Each of the Funds may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular se-
curities with payment and delivery taking place in the future, beyond the nor-
mal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days.
The Funds do not intend to engage in "when-issued" purchases and "forward com-
mitments" for speculative purposes, but only in furtherance of their investment
objectives.
In addition, the Funds may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by them. Under a "stand-by commitment," a dealer
agrees to purchase at a Fund's option specified Municipal Obligations at a
specified price. The Funds will acquire "stand-by commitments" solely to facil-
itate portfolio liquidity and do not intend to exercise their rights thereunder
for trading purposes. "Stand-by commitments" acquired by a Fund will be valued
at zero in determining the Fund's net asset value.
BORROWING AND REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds, in an amount up to 10% of the value of its total
assets, for temporary or emergency purposes, such as meeting larger than antic-
ipated redemption requests, and not for leverage. Each Fund may also agree to
sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The SEC views reverse repurchase agreements as a form
of borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase agree-
ments involve the risk that the market value of the securities sold by a Fund
may decline below the repurchase price of those securities.
ILLIQUID SECURITIES
No Fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. A security will be considered illiquid if it may
not be disposed of within seven days at approximately the value at which the
particular Fund has valued the security. Each Fund may purchase securities
which are not registered under the Securities Act of 1933, as amended (the
"Act"), but which can be sold to "qualified institutional buyers" in accordance
with Rule 144A under the Act. Any such security will not be considered illiquid
so long as it is determined by the Advisers, acting under guidelines
17
<PAGE>
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 a Fund during any period that qualified insti-
tutional buyers are no longer interested in purchasing these restricted secu-
rities.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment immediately after its acquisition
if the Advisers believe that such a disposition is consistent with a Fund's
investment objective. Portfolio investments may be sold for a variety of rea-
sons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold the investments. A high rate
of portfolio turnover may involve correspondingly greater transaction costs,
which must be borne directly by a Fund and ultimately by its shareholders.
Portfolio turnover will not be a limiting factor in making portfolio deci-
sions. High portfolio turnover may result in the realization of substantial
net capital gains. To the extent that net short-term capital gains are real-
ized, any distributions resulting from such gains are considered ordinary in-
come for Federal income tax purposes. (See "Financial Highlights" and "Taxes--
Federal.")
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental pol-
icy and may not be changed with respect to a Fund without the vote of the
holders of a majority of a Fund's outstanding Shares (as defined under "Mis-
cellaneous").
A 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
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed and 10% of the value of its total as-
sets at the time of such borrowing, provided that each Fund may enter into
futures contracts and futures options. (This borrowing provision is in-
cluded solely to facilitate the orderly sale of portfolio securities to ac-
commodate abnormally heavy redemption requests and is not for leverage pur-
poses.) A Fund will 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 securi-
ties of one or more issuers conducting their principal business activities
in the same industry, provided that (a) with respect to the Intermediate-
Term, Long-Term, New York and California Funds, there is no limitation with
respect to domestic bank obligations or securities issued or guaranteed by
the United States; any state or territory; any possession of the U.S. Gov-
ernment; the District of Columbia; or any of their authorities, agencies,
instrumentalities, or political subdivisions, and (b) with respect to the
Short-Term Fund, there is no limitation with respect to securities issued
or guaranteed by the United States; any state or territory; any possession
of the U.S. Government; the District of Columbia; or any of their authori-
ties, agencies, instrumentalities, or political subdivisions.
Each of the Short-Term, Intermediate-Term and Long-Term Funds may not:
3. Purchase securities of any one issuer, other than U.S. Government ob-
ligations, if immediately after such purchase more than 5% of the value of
its total assets would be invested in the securities of such issuer, except
that up to 25% of the value of its total assets may be invested without re-
gard to this 5% limitation.
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<PAGE>
Each of the Intermediate-Term and Long-Term Funds may not:
4. Knowingly invest more than 10% of the value of its total assets in se-
curities which may be illiquid in light of legal or contractual restric-
tions on resale or the absence of readily available market quotations.
The New York Fund may not:
5. Purchase securities of any one issuer if, as a result, more than 5% of
the value of the Fund's total assets would be invested in the securities of
such issuer, except that (a) up to 50% of the value of the Fund's assets
may be invested without regard to this 5% limitation, provided that no more
than 25% of the value of the Fund's total assets are invested in the secu-
rities of any one issuer; and (b) the foregoing 5% limitation does not ap-
ply to securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; and
6. Knowingly invest more than 10% of the value of its total assets in il-
liquid securities, including repurchase agreements with remaining maturi-
ties in excess of seven days and other securities which are not readily
marketable.
* * *
In addition to the investment limitations described above, as a matter of
fundamental policy for each of the Short-Term, Intermediate-Term and Long-Term
Funds, which may not be changed without the vote of the holders of a majority
of the Fund's outstanding shares, a Fund may not invest in the securities of
any single issuer if, as a result, the Fund holds more than 10% of the out-
standing voting securities of such issuer.
The California 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 securities of such issuer, except that (a) up to 50% of the value of the
Fund's assets may be invested without regard to this 5% limitation, provided
that no more than 25% of the value of the Fund's total assets are invested in
the securities of any one issuer; and (b) the foregoing 5% limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. This policy may be changed by Excelsior Tax-Exempt Fund's
Board of Directors without shareholder approval. For purposes of this policy
and Investment Limitation Nos. 3 and 5 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only
by the assets and revenues of a non-governmental user, such non-governmental
user; (b) in certain circumstances, the guarantor of a guaranteed security may
also be considered to be an issuer in connection with such guarantee; and (c)
securities issued or guaranteed by the United States Government, its agencies
or instrumentalities (including securities backed by the full faith and credit
of the United States) are deemed to be U.S. Government obligations.
The Intermediate-Term and Long-Term Funds will not invest more than 25% of
the value of their respective total assets in domestic bank obligations.
The Short-Term and New York Funds will not knowingly invest more than 10% of
the value of their respective net assets in illiquid securities, including re-
purchase agreements with remaining maturities in excess of seven days and other
securities which are not readily marketable.
With respect to all investment policies, if a percentage limitation is satis-
fied at the time of investment, a later increase or decrease in such percentage
resulting from a change in the value of a Fund's portfolio securities will not
constitute a violation of such limitation.
19
<PAGE>
PRICING OF SHARES
The net asset value of each Fund's Shares is determined and priced for pur-
chases and redemptions at the close of regular trading hours on the New York
Stock Exchange (the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset
value and pricing for each Fund's Shares are determined on each day the Ex-
change and the Investment Adviser are open for trading ("Business Day"). Cur-
rently, the holidays which Excelsior Tax-Exempt 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 redemp-
tions is calculated by dividing the value of all securities and other assets
allocable to a Fund, less the liabilities charged to the Fund, by the number
of its outstanding Shares.
Portfolio securities in the Funds for which market quotations are readily
available (other than debt securities maturing in 60 days or less) are valued
at market value. Securities and other assets for which market quotations are
not readily available are valued at fair value, pursuant to the guidelines
adopted by Excelsior Tax-Exempt Fund's Board of Directors. Absent unusual cir-
cumstances, portfolio securities maturing in 60 days or less are normally val-
ued at amortized cost. The net asset value of Shares in the Funds will fluctu-
ate as the market value of their portfolio securities changes in response to
changing market rates of interest and other factors.
Securities traded on only over-the-counter markets are valued on the basis
of closing over-the-counter bid prices. Securities for which there were no
transactions are valued at the average of the most recent bid and asked pric-
es. A futures contract is valued at the last sales price quoted on the princi-
pal exchange or board of trade on which such contract is traded, or in the ab-
sence of a sale, the mean between the last bid and asked prices. Restricted
securities and securities or other assets for which market quotations are not
readily available are valued at fair value pursuant to guidelines adopted by
the Board of Directors.
The Funds' administrators have undertaken to price the securities in the
Funds' portfolios and may use one or more pricing services to value certain
portfolio securities in the Funds where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations so established will be reviewed by the ad-
ministrators under the general supervision of the Board of Directors.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by Excelsior Tax-Ex-
empt Fund's sponsor and distributor, Edgewood Services, Inc. (the "Distribu-
tor"), a wholly-owned subsidiary of Federated Inves- tors, Inc. The Distribu-
tor is a registered broker/dealer. Its principal business address is 5800 Cor-
porate Drive, Pittsburgh, PA 15237-5829.
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 make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria estab-
lished by the Distributor, or that participates in sales programs sponsored by
the Distributor. The Distributor in its discretion may also from time to time,
pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily in-
tended to result in sales of Shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.
20
<PAGE>
In addition, the Distributor may offer to pay a fee from its own assets to
financial institutions for the continuing investment of customers' assets in
the Funds or for providing substantial marketing, sales and operational sup-
port. The support may include initiating customer accounts, participating in
sales, educational and training seminars, providing sales literature, and en-
gineering computer software programs that emphasize the attributes of the
Funds. Such payments will be predicated upon the amount of Shares the finan-
cial institution sells or may sell, and/or upon the type and nature of sales
or marketing support furnished by the financial institution.
PURCHASE OF SHARES
Shares in each Fund are sold at their net asset value per Share next com-
puted after a purchase order is received in good order by the sub-transfer
agent or another entity on behalf of Excelsior Tax-Exempt Fund. The Distribu-
tor has established several procedures for purchasing Shares in order to ac-
commodate 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 agreements
with Excelsior Tax-Exempt Fund. A Shareholder Organization may elect to hold
of record Shares for its Customers and to record beneficial ownership of
Shares on the account statements provided by it to its Customers. If it does
so, it is the Shareholder Organization's responsibility to transmit to the
Distributor all purchase orders for its Customers and to transmit, on a timely
basis, payment for such orders to Chase Global Funds Services Company
("CGFSC"), the Funds' sub-transfer agent, in accordance with the procedures
agreed to by the Shareholder Organization and the Distributor. Confirmations
of all such Customer purchases and redemptions will be sent by CGFSC to the
particular Shareholder Organization. As an alternative, a Shareholder Organi-
zation may elect to establish its Customers' accounts of record with CGFSC. In
this event, even if the Shareholder Organization continues to place its Cus-
tomers' purchase and redemption orders with the Funds, CGFSC will send confir-
mations of such transactions and periodic account statements directly to the
shareholders of record. Shares in the Funds bear the expense of fees payable
to Shareholder Organizations for such services. See "Management of the Funds--
Shareholder Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An Investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such Investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly from the Distributor in accordance with proce-
dures described below under "Purchase Procedures."
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
21
<PAGE>
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to 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, the name of the
Fund and the account number in which the investment is to be made. Institu-
tional Investors may purchase Shares by transmitting their purchase orders to
CGFSC by telephone at (800) 446-1012 or by terminal access. Institutional In-
vestors must pay for Shares with Federal funds or funds immediately available
to 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 Sys-
tem to:
The Chase Manhattan Bank
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 Ap-
plication accompanying this Prospectus and forward it to CGFSC. Redemptions by
Investors 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 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for auto-
matic investment and other cash management services provided. Excelsior Tax-Ex-
empt Fund reserves the right to reject any purchase order, in whole or in part,
or to waive any minimum investment requirements. Third party checks will not be
accepted as payment for Fund Shares.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem
all or part of their investments in the Funds in accordance with procedures
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
22
<PAGE>
charges in connection with such redemptions. Such Investors should contact
their registered investment adviser or certified financial planner for further
information on transaction fees. Investors may redeem all or part of their
Shares in accordance with any of the procedures described below (these proce-
dures 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 ad-
dress 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 receipt
by CGFSC of the redemption request in good order. Questions with respect to the
proper form for redemption requests should be directed to CGFSC at (800) 446-
1012 (from overseas, call (617) 557-8280).
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 to the Direct In-
vestor'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 share-
holder of record at his or her address of record. Institutional 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 In-
vestor's account. The redemption proceeds for Direct Investors must be paid to
the same bank and account as designated on the Application or in written in-
structions subsequently 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-Exempt
Fund, c/o CGFSC, at the address listed above under "Redemption by Mail." Such
requests must be signed by the Direct Investor, with signatures guaranteed (see
"Redemption by Mail" above, for details regarding signature guarantees). Fur-
ther documentation may be requested.
23
<PAGE>
CGFSC and the Distributor reserve the right to refuse a wire or telephone
redemption 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 Ex-
celsior 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
EXPENSE 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 in a Fund after 60 days' written notice if due to Investor
redemptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Or-
ganization to maintain a minimum balance in his or her account at the institu-
tion with respect to Shares of a Fund, and the balance in such account falls
below that minimum, the Customer may be obliged by the Shareholder Organiza-
tion to redeem all or part of his or her Shares to the extent necessary to
maintain the required minimum balance.
GENERAL
Purchase and redemption orders for Shares which are received in good order
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 in good order after the
close of regular trading hours on the Exchange are priced at the net asset
value per Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by Excelsior Tax-Ex-
empt Fund, exchange Shares in a Fund having a value of at least $500 for
shares of any other portfolio offered by Excelsior Tax-Exempt Fund or Excel-
sior Funds, Inc. ("Excelsior Fund"), or for Trust Shares of Excelsior Institu-
tional Trust, provided that such other shares may legally be sold in the state
of the Investor's residence.
Excelsior Fund currently offers 18 investment portfolios as follows:
Money Fund, a money market fund seeking as high a level of current income
as is consistent with liquidity and stability of principal through invest-
ments in high-quality money market instruments maturing within 13 months;
24
<PAGE>
Government 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 obligations issued or guaranteed by the U.S. Govern-
ment, its agencies and instrumentalities and repurchase agreements collat-
eralized 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
instrumentalities of the U.S. Government;
Short-Term Government Securities Fund, a fund seeking a high level of
current income by investing principally in obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and repurchase
agreements collateralized by such obligations, and having a dollar-weighted
average portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of
current 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 primarily
through investments in investment grade debt obligations, U.S. Government
obligations and money market instruments;
Blended Equity Fund, a fund seeking long-term capital appreciation
through investments in a diversified portfolio of primarily equity securi-
ties;
Income and Growth Fund, a fund seeking to provide moderate current income
and to achieve capital appreciation as a secondary objective by investing
in common stock, preferred stock and securities convertible into common
stock;
Energy and Natural Resources Fund, a non-diversified fund seeking long-
term capital appreciation by investing in companies that are in the energy
and other natural resources groups of industries;
Value and Restructuring Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefitting from their restructuring or re-
deployment of assets and operations in order to become more competitive or
profitable;
Small Cap Fund, a fund seeking long-term capital appreciation by invest-
ing primarily in companies with capitalization of $1 billion or less;
Large Cap Growth Fund, a fund seeking superior, risk-adjusted total re-
turn by investing in larger companies whose growth prospects, in the opin-
ion of its investment adviser, appear to exceed that of the overall market;
Real Estate Fund, a non-diversified fund seeking current income and long-
term capital appreciation by investing in real estate investment trusts and
other companies principally engaged in the real estate business;
International Fund, a fund seeking total return derived primarily from
investments in foreign equity securities;
Latin America Fund, a fund seeking long-term capital appreciation through
investments in companies and securities of governments based in all coun-
tries in Central and South America;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through
investments in companies and securities of governments based in Asia and on
the Asian side of the Pacific Ocean;
Pan European Fund, a fund seeking long-term capital appreciation through
investments in companies and securities of governments based in Europe; and
Emerging Markets Fund, a fund seeking long-term capital appreciation
through investments primarily in equity securities of emerging country is-
suers.
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<PAGE>
Excelsior Tax-Exempt Fund currently offers 2 additional portfolios as fol-
lows:
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 investments primarily in high-quality municipal obligations
maturing within 13 months; and
New York Tax-Exempt Money Fund, a non-diversified tax-exempt money market
fund seeking a moderate level of current interest income exempt from Fed-
eral and, to the extent possible, New York State and New York City income
taxes through investments primarily in New York municipal obligations ma-
turing within 13 months.
Excelsior Institutional Trust currently offers Trust Shares in the following
investment portfolios:
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 ex-
ceed that of the overall market; and
Value Equity Fund, a fund seeking long-term capital appreciation through
investments in a diversified portfolio of equity securities whose market
value, in the opinion of its investment adviser, appears to be undervalued
relative to the marketplace.
An exchange involves a redemption of all or a portion of the Shares in a Fund
and the investment of the redemption proceeds in shares of another portfolio of
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 in good order.
The shares of the portfolio to be acquired will be purchased at the per share
net asset value of those shares next determined after receipt of the exchange
request in good order.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in a Fund. For further
information regarding exchange privileges, shareholders should call (800) 446-
1012 (from overseas, call (617) 557-8280). Investors exercising the exchange
privilege with the other portfolios of Excelsior Tax-Exempt Fund, Excelsior
Fund or Excelsior Institutional Trust should request and review the prospec-
tuses of such funds. Such prospectuses may be obtained by calling the telephone
numbers listed above. In order to prevent abuse of this privilege to the disad-
vantage of other shareholders, Excelsior Fund, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust reserve the right to limit the number of exchange
requests of Investors and Customers of Shareholder Organizations to no more
than six per year. Excelsior Tax-Exempt Fund may modify or terminate the ex-
change program at any time upon 60 days' written notice to shareholders, and
may reject any exchange request.
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
making an exchange, an Investor should consult a tax or other financial adviser
to determine tax consequences.
Exchanges by Telephone. For shareholders who have previously selected the
telephone exchange option, an exchange order may be placed by calling (800)
446-1012 (from overseas, please call (617) 557-8280). By establishing the tele-
phone exchange option, a shareholder authorizes CGFSC and the Distributor to
act upon telephone instructions believed to be genuine. EXCELSIOR TAX-EXEMPT
FUND, EXCELSIOR FUND, EXCELSIOR INSTITUTIONAL TRUST, CGFSC AND THE DISTRIBUTOR
ARE NOT RESPONSIBLE FOR THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED BY TELE-
PHONE THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT
TELEPHONE INSTRUCTIONS ARE GENUINE, EXCELSIOR TAX-EXEMPT FUND, EXCELSIOR FUND
AND EXCELSIOR INSTITUTIONAL TRUST WILL USE SUCH PROCEDURES AS ARE CONSIDERED
REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMATION
AS TO ACCOUNT REGISTRATION.
26
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a 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 Section 9 of the New Ac-
count Application contained in this Prospectus and mail it to CGFSC at the ad-
dress 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 sys-
tematic withdrawal plans with respect to the Shares held by their Customers.
Information about such plans and the applicable procedures may be obtained by
Customers directly from their Shareholder Organizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (mini-
mum of $50 per Fund per transaction) at regular intervals selected by the In-
vestor. The minimum initial investment for an Automatic Investment Program ac-
count is $50 per Fund. Provided the Investor's financial institution allows
automatic withdrawals, Shares are purchased by transferring funds from an In-
vestor's checking, bank money market or NOW account designated by the Invest-
or. At the Investor's option, the account designated will be debited in the
specified amount, and Shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.
The Automatic Investment Program is one means by which an Investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time 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 Section 8 of the New Account 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 effec-
tive three Business Days following receipt. Excelsior Tax-Exempt Fund may mod-
ify or terminate this privilege at any time or charge a service fee, although
no such fee currently is contemplated. An Investor may also implement the Dol-
lar Cost Averaging method on his own initiative or through other entities.
DIVIDENDS AND DISTRIBUTIONS
Each Fund's net income for dividend purposes consists of (i) all accrued in-
come, whether taxable or tax-exempt, plus discount earned on the Fund's 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 each Fund on the basis
of its relative net assets.
27
<PAGE>
The net investment income of the Funds is declared daily as a dividend to
the persons who are shareholders of the respective Funds at the opening of
business on the day of declaration. All such dividends are paid within ten
days after the end of each month or within seven days after the redemption of
all of a shareholder's Shares of a Fund. Net realized capital gains are dis-
tributed at least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of other Shareholder Organi-
zations will receive dividends and distributions in additional Shares of the
Fund on which the dividend or distribution is paid (as determined on the pay-
able date), unless they have requested in writing (received by CGFSC at Excel-
sior 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
Each of the Funds qualified for its last taxable year as a "regulated in-
vestment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund expects to so qualify in future years. Such qualification
generally relieves a Fund of liability for Federal income taxes to the extent
its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that a Fund distribute to its shareholders an amount equal
to at least the sum of 90% of its investment company taxable income and 90% of
its exempt-interest income (if any), net of certain deductions for each tax-
able year. In general, a Fund's investment company taxable income will be its
taxable income (including interest) subject to certain adjustments and exclud-
ing the excess of any net long-term capital gain for the taxable year over the
net short-term capital loss, if any, for such year. It is anticipated that
none of the dividends paid by the Funds will be eligible for the dividends re-
ceived deduction for corporations.
Each Fund's policy is to pay dividends each year equal to at least the sum
of 90% of its net exempt-interest income and 90% of its investment company
taxable income, if any. Some dividends derived from exempt-interest income
("exempt-interest dividends") may be treated by a Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the
Code, unless, under the circumstances applicable to the particular sharehold-
er, exclusion would be disallowed. (See the Statement of Additional Informa-
tion under "Additional Information Concerning Taxes.")
If a Fund should hold certain "private activity bonds" issued after August
7, 1986, the portion of dividends paid by the Fund which is attributable to
interest on such bonds must be included in a shareholder's Federal alternative
minimum taxable income, as an item of tax preference, for the purpose of de-
termining liability (if any) for the 26% to 28% alternative minimum tax appli-
cable to individuals and the 20% alternative minimum tax applicable to corpo-
rations. Corporate shareholders must also take all exempt-interest dividends
into account in determining certain adjustments for Federal alternative mini-
mum tax purposes. Shareholders receiving Social Security benefits should note
that all exempt-interest dividends will be taken into account in determining
the taxability of such benefits.
Dividends payable by the Funds which are derived from taxable income or from
long-term or short-term capital gains will be subject to Federal income tax,
whether such dividends are paid in the form of cash or additional Shares.
Distributions by a Fund of the excess of its net long-term capital gain over
its net short-term capital loss are taxable to shareholders as long-term capi-
tal gain, regardless of how long the shareholder has held the Shares and
whether such gains are received in cash or reinvested in additional Shares.
28
<PAGE>
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
An Investor considering buying Shares of a Fund on or just before the record
date of a 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.
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 or her tax ba-
sis for such Shares for the purpose of determining gain or loss on a redemp-
tion, transfer or exchange of such Shares. However, if the shareholder effects
an exchange of such Shares for Shares of another Fund within 90 days of the
purchase and is able to reduce the sales charges otherwise applicable to the
new Shares (by virtue of the exchange privilege), the amount equal to reduc-
tion 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 (sub-
ject to the limitation) in the tax basis of the new Shares.
NEW YORK
Exempt-interest dividends (as defined for Federal income tax purposes) de-
rived from interest on New York Municipal Obligations (as defined above) will
be exempt from New York State and New York City personal income taxes (but not
corporate franchise taxes), provided the interest on such obligations is and
continues to be exempt from applicable Federal, New York State and New York
City income taxes. To the extent that Investors are subject to state and local
taxes outside of New York State and New York City, distributions by the New
York Fund may be taxable income for purposes thereof. Dividends and distribu-
tions derived from income (including capital gains on all New York Municipal
Obligations) other than interest on the New York Municipal Obligations de-
scribed above are not exempt from New York State and New York City taxes. A
percentage of the interest on indebtedness incurred or continued by a share-
holder to purchase or carry Shares of the New York Fund generally is not de-
ductible for Federal, New York State or New York City personal income tax pur-
poses.
CALIFORNIA
If, at the close of each quarter of its taxable year, at least 50% of the
value of the California 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 sharehold-
ers. The dividends exempt from that tax will be those that come from interest
attributable to California Municipal Obligations and certain Federal obliga-
tions. (Such exemption may not apply, however, to Investors who are "substan-
tial users" or "related persons" with respect to facilities financed by port-
folio securities held by the Fund. Additional tax information regarding "sub-
stantial users" and "related persons" can be found in the Statement of Addi-
tional 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 additional shares) will be subject to Califor-
nia state personal income tax.
29
<PAGE>
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 Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situa-
tions. Shareholders will be advised at least annually as to the Federal, New
York State, New York City and California personal income tax consequences of
distributions made each year.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds 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 ("U.S. Trust New York") and U.S.
Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively with
U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as the
Investment Adviser to the Funds. U.S. Trust New York is a state-chartered bank
and trust company and a member bank of the Federal Reserve System. U.S. Trust
Connecticut is a Connecticut state bank and trust company. U.S. Trust New York
and U.S. Trust Connecticut are wholly-owned subsidiaries of U.S. Trust Corpo-
ration, a registered bank holding company.
The Investment 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. On De-
cember 31, 1997, the Asset Management Groups of U.S. Trust New York and U.S.
Trust Connecticut had approximately $61.2 billion in aggregate assets under
management. U.S. Trust New York has its principal offices at 114 W. 47th
Street, New York, New York 10036. U.S. Trust Connecticut has its principal of-
fices at 225 High Ridge Road, East Building, Stamford, Connecticut 06905.
The Investment Adviser manages the Short-Term, Intermediate-Term, Long-Term
and New York Funds, makes decisions with respect to and places orders for all
purchases and sales of their portfolio securities, and maintains records re-
lating to such purchases and sales.
The Short-Term, Intermediate-Term, Long-Term and New York Funds' portfolio
manager, Kenneth J. McAlley, is the person primarily responsible for the day-
to-day management of the Funds' investment portfolios. Mr. McAlley, Executive
Vice President and Manager of the Fixed Income Investment Division of U.S.
Trust, has been with U.S. Trust since 1980 and has been the Long-Term Fund's
portfolio manager since 1986 and the Short-Term, Intermediate-Term and New
York Funds' portfolio manager since 1995.
U.S. Trust Company, N.A. (formerly, "U.S. Trust Company of California"),
provides sub-advisory services to the California Fund. U.S. Trust Company,
N.A. (the "Sub-Adviser") is a national bank and a wholly-owned subsidiary of
U.S. Trust Corporation. The Sub-Adviser has its principal offices at 515 South
Flower Street, Los Angeles, CA 90071.
30
<PAGE>
The Sub-Adviser manages the California Fund, makes decisions with respect to
and places orders for all purchases and sales of its portfolio securities, and
maintains records relating to such purchases and sales.
The California Fund's portfolio managers, Lois G. Ingham, C.F.A., and Alan
G. Remedios, are the persons primarily responsible for the day-to-day manage-
ment of the Fund's investment portfolio. Ms. Ingham, a Senior Vice President
and Director of Fixed Income Investments, has been with the Sub-Adviser since
1990 and has managed the Fund since its inception. Mr. Remedios, a Vice Presi-
dent in the Sub-Adviser's Fixed-Income Division, has been with the Sub-Adviser
since 1993 and has managed the Fund since August 1998.
For the services provided and expenses assumed pursuant to its Investment
Advisory Agreements, the Investment Adviser is entitled to be paid a fee, com-
puted daily and paid monthly, at the annual rates of 0.30% of the average
daily net assets of the Short-Term Fund, 0.35% of the average daily net assets
of the Intermediate-Term Fund, and 0.50% of the average daily net assets of
each of the Long-Term, New York and California Funds. The Sub-Adviser is enti-
tled to receive from the Investment Adviser an annual fee, computed and paid
monthly, at the annual rate of 0.50% of the average daily net assets of the
California Fund.
Prior to May 16, 1997, U.S. Trust New York served as investment adviser to
the Funds pursuant to advisory agreements substantially similar to the Invest-
ment Advisory Agreements currently in effect for the Funds. For the fiscal
year ended March 31, 1998, U.S. Trust received an advisory fee at the effec-
tive annual rates of 0.24%, 0.29%, 0.43%, 0.47% and 0.00% of the average daily
net assets of the Short-Term, Intermediate-Term, Long-Term, New York and Cali-
fornia Funds, respectively. For the same period, U.S. Trust waived advisory
fees at the effective annual rates of 0.06%, 0.06%, 0.07%, 0.03% and 0.50% of
the average daily net assets of the Short-Term, Intermediate-Term, Long-Term,
New York and California Funds, respectively, and reimbursed expenses at the
effective annual rate of 0.24% of the California Fund's average daily net as-
sets. For the same period, the Sub-Adviser received no sub-advisory fee from
U.S. Trust, and the Sub-Adviser waived sub-advisory fees at the effective an-
nual rate of 0.50% of the California Fund's average daily net assets.
From time to time, the Investment Adviser and Sub-Adviser (collectively, the
"Advisers") may voluntarily waive all or a portion of the advisory and sub-ad-
visory fees payable by a Fund and U.S. Trust, respectively, which waivers may
be terminated at any time. See "Management of the Funds--Shareholder Organiza-
tions" for additional information on fee waivers.
ADMINISTRATORS
CGFSC, Federated Administrative Services and U.S. Trust Connecticut serve as
the Funds' administrators (the "Administrators") and provide them with general
administrative and operational assistance. The Administrators also serve as
administrators of the other portfolios of Excelsior Tax-Exempt Fund and of all
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:
31
<PAGE>
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF EXCELSIOR TAX-EXEMPT
FUND,
EXCELSIOR FUND AND EXCELSIOR
INSTITUTIONAL TRUST
(EXCLUDING THE INTERNATIONAL PORTFOLIOS
OF
EXCELSIOR FUND AND EXCELSIOR
INSTITUTIONAL TRUST) ANNUAL FEE
--------------------------------------- ----------
<S> <C>
first $200 million..................... 0.200%
next $200 million...................... 0.175%
over $400 million...................... 0.150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of Ex-
celsior Tax-Exempt Fund, Excelsior Fund and Excelsior Institutional Trust are
allocated in proportion to their relative average daily net assets at the time
of determination. From time to time, the Administrators may voluntarily waive
all or a portion of the administration fee payable to them by a Fund, which
waiver may be terminated at any time. See "Management of the Funds--Share-
holder Organizations" for additional information on fee waivers.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and U.S.
Trust New York served as the Funds' administrators pursuant to an administra-
tion agreement substantially similar to the administration agreement currently
in effect for the Funds. For the fiscal year ended March 31, 1998, CGFSC, Fed-
erated Administrative Services and U.S. Trust received an aggregate adminis-
tration fee at the effective annual rates of 0.153%, 0.153%, 0.150%, 0.153%
and 0.153% of the average daily net assets of the Short-Term, Intermediate-
Term, Long-Term, New York and California Funds, respectively, and waived ad-
ministration fees at the effective annual rate of 0.003% of the average daily
net assets of the Long-Term Fund.
SHAREHOLDER ORGANIZATIONS
As described above under "Purchase of Shares," Excelsior Tax-Exempt Fund has
agreements with certain Shareholder Organizations--firms that provide servic-
es, which may include acting as record shareholder, to their Customers who
beneficially own Shares. As a consideration for these services, a Fund will
pay the Shareholder Organization an administrative service fee up to the an-
nual rate of 0.40% of the average daily net asset value of its Shares held by
the Shareholder Organization's Customers. Such services, which are described
more fully in the Statement of Additional Information under "Management of the
Funds--Shareholder Organizations," may include assisting in processing pur-
chase, exchange and redemption requests; transmitting and receiving funds in
connection with Customer orders to purchase, exchange or redeem Shares; and
providing periodic statements. It is the responsibility of Shareholder Organi-
zations to advise Customers of any fees that they may charge in connection
with a Customer's investment. Until further notice, the Investment Adviser and
Administrators have voluntarily agreed to waive fees payable by a Fund in an
aggregate amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company reg-
istered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a regis-
tered, open-end investment company continuously engaged in the issuance of its
shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Shares of the Funds, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks gen-
erally 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 Advisers, CGFSC and certain Shareholder Organiza-
tions may be subject to such banking laws and regulations. State securities
laws may differ from the interpretations of Federal law discussed in this par-
agraph and banks and financial institutions may be required to register as
dealers pursuant to state law.
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<PAGE>
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Advisers or other Shareholder Organizations in connec-
tion with purchases of Fund Shares, the Advisers and such Shareholder Organi-
zations might be required to alter materially or discontinue the investment
services offered by them to Customers. It is not anticipated, however, that
any resulting change in the Funds' method of operations would affect their net
asset values 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 7
classes of shares representing 7 investment portfolios currently being of-
fered. Excelsior Tax-Exempt Fund's Charter authorizes the Board of Directors
to classify or reclassify any class of shares of Excelsior Tax-Exempt Fund
into one or more classes or series. Shares of Class B, C, D, E and F represent
interests in the Intermediate-Term, Long-Term, New York, California and Short-
Term Funds, respectively.
Each Share represents an equal proportionate interest in the particular Fund
with other Shares of the same class, and is entitled to such dividends and
distributions out of the income earned on the assets belonging to such Fund as
are declared in the discretion of Excelsior Tax-Exempt Fund's Board of Direc-
tors.
Shareholders are entitled to one vote for each full Share held, and frac-
tional 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
writing to CGFSC and will not be issued for fractional Shares.
As of July 8, 1998, U.S. Trust and its affiliates held of record substan-
tially all of Excelsior Tax-Exempt Fund's outstanding shares as agent or cus-
todian for their customers, but did not own such shares beneficially because
they did not have voting or investment discretion with respect to such shares.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The Chase
Manhattan Corporation, serves as the custodian of the Funds' assets. Communi-
cations to the custodian should be directed to Chase, Mutual Funds Service Di-
vision, 3 Chase MetroTech Center, 8th Floor, Brooklyn, NY 11245.
U.S. Trust New York serves as the Funds' transfer and dividend disbursing
agent. U.S. Trust New York has entered into a sub-transfer agency arrangement
with CGFSC, 73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to
which CGFSC provides certain transfer agent, dividend disbursement and regis-
trar services to the Funds.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance and yields of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indexes
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance
33
<PAGE>
of a 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 Funds.
Each Fund may advertise its effective yield which is calculated by dividing
its average daily net investment income per Share during a 30-day (or one
month) base period identified in the advertisement by its net asset value per
Share on the last day of the period, and annualizing the result on a semian-
nual basis.
In addition, each Fund may from time to time advertise its "tax-equivalent
yield" to demonstrate the level of taxable yield necessary to produce an 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 income taxes (and New York
State and New York City income taxes, with respect to the New York Fund, and
California income taxes, with respect to the California Fund) at a stated tax
rate.
From time to time, each Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure
reflects the average percentage change in the value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring
period. Average total return figures will be given for the most recent one-
year period and may be given for other periods as well (such as from the com-
mencement of a Fund's operations, or on a year-by-year basis). Each Fund may
also use aggregate total return figures for various periods, representing the
cumulative change in the value of an investment in the Fund for the specific
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.
Performance and yields will fluctuate and any quotation of performance and
yield should not be considered as representative of a Fund's future perfor-
mance. Since yields fluctuate, yield data cannot necessarily be used to com-
pare an investment in the Funds with bank deposits, savings accounts and simi-
lar investment alternatives which often provide an agreed or guaranteed fixed
yield for a stated period of time. Shareholders should remember that the per-
formance and yield are generally functions of the kind and quality of the in-
struments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with re-
spect to accounts of Customers that have invested in Shares will not be in-
cluded in calculations of yield and performance.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds'
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 a particular Fund means, with
respect to the approval of an investment advisory agreement or a change in a
fundamental investment policy, the affirmative vote of the lesser of (a) more
than 50% of the outstanding shares of Excelsior Tax-Exempt Fund or such Fund,
or (b) 67% or more of the shares of Excelsior Tax-Exempt Fund or such Fund
present at a meeting if more than 50% of the outstanding shares of Excelsior
Tax-Exempt Fund or such Fund are represented at the meeting in person or by
proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at
the address listed under "Distributor."
34
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application and mail to: FOR OVERNIGHT DELIVERY: send to:
Excelsior Funds Excelsior Funds
c/o Chase Global Funds Services Company c/o Chase Global Funds Services
P.O. Box 2798 Company
Boston, MA 02208-2798 73 Tremont
Street Boston, MA 02108-3913
Please enclose with the Application your check made payable to the "Excel-
sior 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
per Fund; subsequent investments must be in the minimum amount of $50 per
Fund. Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other 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.
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 sub-transfer agent at (800) 446-1012 between 9:00
a.m. and 5:00 p.m. (Eastern Time).
35
<PAGE>
PROSPECTUS AUGUST 1, 1998
LOGO
EXCELSIOR
TAX-EXEMPT FUNDS INC.
SHORT-TERM TAX-EXEMPT SECURITIES FUND
INTERMEDIATE-TERM TAX-EXEMPT FUND
LONG-TERM TAX-EXEMPT FUND
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT INCOME FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................................................... 3
EXPENSE SUMMARY....................................................... 4
FINANCIAL HIGHLIGHTS.................................................. 5
INVESTMENT OBJECTIVES AND POLICIES.................................... 10
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION................ 14
INVESTMENT LIMITATIONS................................................ 18
PRICING OF SHARES..................................................... 20
HOW TO PURCHASE AND REDEEM SHARES..................................... 20
INVESTOR PROGRAMS..................................................... 24
DIVIDENDS AND DISTRIBUTIONS........................................... 27
TAXES................................................................. 28
MANAGEMENT OF THE FUNDS............................................... 30
DESCRIPTION OF CAPITAL STOCK.......................................... 33
CUSTODIAN AND TRANSFER AGENT.......................................... 33
PERFORMANCE AND YIELD INFORMATION..................................... 33
MISCELLANEOUS......................................................... 34
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION.............................. 35
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OF-
FERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY EXCELSIOR
TAX-EXEMPT FUND OR BY ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY EXCELSIOR TAX-EXEMPT FUND OR BY ITS DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
USTTXXP898
<PAGE>
EXCELSIOR FUNDS, INC.
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectuses for the Short-Term Government
Securities Fund, Intermediate-Term Managed Income Fund and Managed Income Fund
of Excelsior Funds, Inc. ("Excelsior Fund") and the Short-Term Tax-Exempt
Securities Fund, Intermediate-Term Tax-Exempt Fund and Long-Term Tax-Exempt Fund
of Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund") dated August
1, 1998, respectively (the "Fixed-Income Funds Prospectus" and the "Tax-Exempt
Funds Prospectus," respectively; together, the "Prospectuses"). Much of the
information contained in this Statement of Additional Information expands upon
the subjects discussed in the Prospectuses. No investment in shares of the
portfolios described herein ("Shares") should be made without reading the
Prospectuses. A copy of each Prospectus may be obtained by writing Excelsior
Funds c/o Chase Global Funds Services Company, 73 Tremont Street, Boston, MA
02108-3913 or by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES........................................... 1
Additional Information on Portfolio Instruments......................... 1
Additional Investment Limitations....................................... 9
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................13
INVESTOR PROGRAMS............................................................15
Systematic Withdrawal Plan..............................................15
Exchange Privilege......................................................15
Other Investor Programs.................................................16
DESCRIPTION OF CAPITAL STOCK.................................................16
MANAGEMENT OF THE FUNDS......................................................18
Directors and Officers..................................................18
Shareholder Organizations...............................................28
Expenses................................................................29
Custodian and Transfer Agent............................................29
PORTFOLIO TRANSACTIONS.......................................................30
INDEPENDENT AUDITORS.........................................................32
COUNSEL......................................................................32
ADDITIONAL INFORMATION CONCERNING TAXES......................................32
Generally...............................................................32
Tax-Exempt Funds........................................................33
PERFORMANCE AND YIELD INFORMATION............................................37
Yields and Performance..................................................37
MISCELLANEOUS................................................................40
FINANCIAL STATEMENTS.........................................................41
APPENDIX A..................................................................A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
This Statement of Additional Information contains additional
information with respect to the Short-Term Tax-Exempt Securities Fund,
Intermediate-Term Tax-Exempt Fund and Long-Term Tax-Exempt Fund (collectively,
the "Tax-Exempt Funds") of Excelsior Tax-Exempt Fund and the Short-Term
Government Securities Fund, Intermediate-Term Managed Income Fund and Managed
Income Fund of Excelsior Fund (collectively, the "Fixed-Income Funds"). The
portfolios are referred to individually as a "Fund" and collectively as the
"Funds;" Excelsior Tax-Exempt Fund and Excelsior Fund are referred to
individually as a "Company" and collectively as the "Companies."
For ease of reference, the various Funds are referred to as follows:
Short-Term Tax-Exempt Securities Fund as "Short-Term Tax-Exempt Fund;"
Intermediate-Term Tax-Exempt Fund as "IT Tax-Exempt Fund;" Long-Term Tax-Exempt
Fund as "LT Tax-Exempt Fund;" Short-Term Government Securities Fund as "ST
Government Fund;" and Intermediate-Term Managed Income Fund as "IT Income Fund."
The following information supplements the description of the Funds'
investment objectives and policies as set forth in the Prospectuses.
Additional Information on Portfolio Instruments
- -----------------------------------------------
Municipal Obligations
---------------------
The Tax-Exempt Funds invest substantially all of their assets in
Municipal Obligations as defined in the Prospectus. Municipal Obligations
include debt obligations issued by governmental entities to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses, and the extension of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance various privately operated facilities are included within
the term "Municipal Obligations" only if the interest paid thereon is exempt
from regular Federal income tax and not treated as a specific tax preference
item under the Federal alternative minimum tax.
The two principal classifications of Municipal Obligations are
"general obligation" and "revenue" issues, but the Tax-Exempt Funds' portfolios
may include "moral obligation" issues. 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 nationally recognized statistical rating organizations
("NRSROs") such as Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Ratings Services ("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
<PAGE>
with the same maturity, interest rate, and rating may have different yields
while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a Fund,
an issue of Municipal Obligations may cease to be rated, or its rating may be
reduced below the minimum rating required for purchase by that Fund. United
States Trust Company of New York ("U.S. Trust New York") and U.S. Trust Company
of Connecticut ("U.S. Trust Connecticut" and, collectively with U.S. Trust New
York, the "Investment Adviser" or "U.S. Trust") will consider such an event in
determining whether a Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multistate
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information and the Prospectus. An issuer's
obligations under its Municipal Obligations are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. The
power or ability of an issuer to meet its obligations for the payment of
interest on and principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
Among other instruments, the Tax-Exempt Funds may purchase short-term
General Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes,
Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, each Fund may invest in long-term
tax-exempt instruments, such as municipal bonds and private activity bonds, to
the extent consistent with the maturity restrictions applicable to it.
-2-
<PAGE>
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither Excelsior
Tax-Exempt Fund nor the Investment Adviser will review the proceedings relating
to the issuance of Municipal Obligations or the bases for such opinions.
The IT Income and Managed Income Funds may, when deemed appropriate by
the Investment Adviser in light of the Funds' investment objective, also invest
in Municipal Obligations. Although yields on municipal obligations can generally
be expected under normal market conditions to be lower than yields on corporate
and U.S. Government obligations, from time to time municipal securities have
outperformed, on a total return basis, comparable corporate and Federal debt
obligations as a result of prevailing economic, regulatory or other
circumstances. Dividends paid by the IT Income and Managed Income Funds that are
derived from interest on municipal securities would be taxable to the Funds'
shareholders for Federal income tax purposes.
Insured Municipal Obligations
-----------------------------
The Tax-Exempt Funds may purchase Municipal Obligations which are
insured as to timely payment of principal and interest at the time of purchase.
The insurance policies will usually be obtained by the issuer of the bond at the
time of its original issuance. Bonds of this type will be acquired only if at
the time of purchase they satisfy quality requirements generally applicable to
Municipal Obligations as described in the Prospectus. Although insurance
coverage for the Municipal Obligations held by the Tax-Exempt Funds reduces
credit risk by insuring that the Funds will receive timely payment of principal
and interest, it does not protect against market fluctuations caused by changes
in interest rates and other factors. Each Tax-Exempt Fund may invest more than
25% of its net assets in Municipal Obligations covered by insurance policies.
-3-
<PAGE>
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements are held by the Funds' custodian (or sub-custodian) or
in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered loans by a Fund under the Investment Company Act of 1940, as amended
(the "1940 Act").
Securities Lending
------------------
When the ST Government Fund, IT Income Fund and Managed Income Fund
lend their portfolio securities, they continue to receive interest or dividends
on the securities lent and may simultaneously earn interest on the investment of
the cash loan collateral, which will be invested in readily marketable, high-
quality, short-term obligations. Although voting rights, or rights to consent,
attendant to securities lent pass to the borrower, such loans may be called at
any time and will be called so that the securities may be voted by the pertinent
Fund if a material event affecting the investment is to occur.
Government Obligations
----------------------
Examples of the types of U.S. Government obligations that may be held
by the Funds include, in addition to U.S. Treasury Bills, the obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, Federal National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks and Maritime Administration.
-4-
<PAGE>
When-Issued and Forward Transactions
------------------------------------
When a Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceeded
25% of the value of its assets.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it on the other party to consummate the trade. Failure of such
other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
-5-
<PAGE>
Stand-By Commitments
--------------------
The Managed Income and IT Income Funds and the Tax-Exempt Funds may
acquire "stand-by commitments" with respect to Municipal Obligations held by
them. Under a "stand-by commitment," a dealer or bank agrees to purchase from a
Fund, at the Fund's option, specified Municipal Obligations at a specified
price. The amount payable to a Fund upon its exercise of a "stand-by commitment"
is normally (i) the Fund's acquisition cost of the Municipal Obligations
(excluding any accrued interest which the Fund paid on their acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period. "Stand-by commitments" are exercisable by a Fund at any time before the
maturity of the underlying Municipal Obligations, and may be sold, transferred
or assigned by the Fund only with the underlying instruments.
The Managed Income and IT Income Funds and the Tax-Exempt Funds expect
that "stand-by commitments" will generally be available without the payment of
any direct or indirect consideration. However, if necessary or advisable, a Fund
may pay for a "stand-by commitment" either separately in cash or by paying a
higher price for securities which are acquired subject to the commitment (thus
reducing the yield to maturity otherwise available for the same securities).
Where a Fund has paid any consideration directly or indirectly for a "stand-by
commitment," its cost will be reflected as unrealized depreciation for the
period during which the commitment was held by the Fund.
The Managed Income and IT Income Funds and the Tax-Exempt Funds intend
to enter into "stand-by commitments" only with banks and broker/dealers which,
in the Investment Adviser's opinion, present minimal credit risks. In evaluating
the creditworthiness of the issuer of a "stand-by commitment," the Investment
Adviser will review periodically the issuer's assets, liabilities, contingent
claims and other relevant financial information.
Commercial Paper
----------------
Investments by the Funds in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire unrated commercial paper that is determined by
the Investment Adviser at the time of purchase to be of comparable quality to
rated instruments that may be acquired by the particular Fund. Each Fund will
generally limit its investments in such unrated commercial paper to 5% of its
total assets.
-6-
<PAGE>
Futures Contracts
-----------------
Each Fund may invest in futures contracts (interest rate futures
contracts or municipal bond index futures contracts, as applicable). Futures
contracts will not be entered into for speculative purposes, but to hedge risks
associated with a Fund's securities investments. Positions in futures contracts
may be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to effectively hedge.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. In addition, in some situations, if
a Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of
-7-
<PAGE>
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Forward Currency Transactions
-----------------------------
The Managed Income and IT Income Funds will conduct their currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange markets, or by entering into forward currency
contracts. A forward foreign currency contract involves an obligation to
purchase or sell a specific currency for a set price at a future date. In this
respect, forward currency contracts are similar to foreign currency futures
contracts; however, unlike futures contracts which are traded on recognized
commodities exchange, forward currency contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. Also, forward currency contracts usually involve
delivery of the currency involved instead of cash payment as in the case of
futures contracts.
A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose of
transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Funds will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
a Fund's assets, but will be employed as necessary to correspond to particular
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least
-8-
<PAGE>
equal to the market price at which the short position was established. Asset
segregation requirements are not applicable when a Fund "covers" a forward
currency position generally by entering into an offsetting position.
The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Investment Adviser may be
incorrect in its expectations as to currency fluctuations, and a Fund may incur
losses in connection with its currency transactions that it would not otherwise
incur. If a price movement in a particular currency is generally anticipated, a
Fund may not be able to contract to sell or purchase that currency at an
advantageous price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
Additional Investment Limitations
- ---------------------------------
In addition to the investment limitations disclosed in the
Prospectuses, the Funds are subject to the investment limitations enumerated
below. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding Shares
(as defined under "Miscellaneous" in the Prospectuses). However, investment
limitations which are "operating policies" with respect to a Fund may be changed
by Excelsior Fund's or Excelsior Tax-Exempt Fund's Board of Directors without
shareholder approval.
The following investment limitations are fundamental with respect to
each Fund. No Fund may:
-9-
<PAGE>
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Tax-Exempt Funds' investment objectives, policies, and limitations may
be deemed to be underwriting; and except insofar as the Managed Income Fund
might be deemed to be an underwriter upon disposition of certain portfolio
securities acquired within the limitation on purchases of restricted securities;
2. Purchase or sell real estate, except that each Tax-Exempt Fund may
invest in Municipal Obligations secured by real estate or interests therein, and
the Managed Income and Intermediate-Term Managed Income Funds may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate; and
3. Issue any senior securities, except insofar as any borrowing by
each Fund in accordance with its investment limitations might be considered to
be the issuance of a senior security; provided that each Fund may enter into
futures contracts and futures options.
The following investment limitation is fundamental with respect to the
IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds, but is an operating
policy with respect to the Short-Term Tax-Exempt, ST Government and IT Income
Funds. The Funds may not:
4. Purchase securities on margin, make short sales of securities, or
maintain a short position; provided that each Fund may enter into futures
contracts and futures options.
The following investment limitation is fundamental with respect to each Tax-
Exempt Fund. A Tax-Exempt Fund may not:
5. Make loans, except that each Tax-Exempt Fund may purchase or hold
debt obligations in accordance with its investment objective, policies, and
limitations.
The following investment limitation is fundamental with respect to the
IT Tax-Exempt and LT Tax-Exempt Funds, but is an operating policy with respect
to the Short-Term Tax-Exempt Fund. A Tax-Exempt Fund may not:
6. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that a Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.
The following investment limitations are fundamental with respect to
the Managed Income Fund, but are operating policies with respect to the IT
Income and ST Government Funds. A Fixed-Income Fund may not:
-10-
<PAGE>
7. Invest in companies for the purpose of exercising management or
control;
8. Purchase foreign securities; provided that subject to the limit
described below, the IT Income and Managed Income Funds may purchase (a) dollar-
denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and
9. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds. The IT Tax-Exempt, LT
Tax-Exempt and Managed Income Funds may not:
10. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that each Fund may enter into futures contracts and futures
options; and
11. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Funds may
enter into futures contracts and futures options.
The following investment limitation is fundamental with respect to the
Short-Term Tax-Exempt, ST Government and IT Income Funds. The Short-Term Tax-
Exempt, ST Government and IT Income Funds may not:
12. Purchase or sell commodities or commodity futures contracts, or
invest in oil, gas, or mineral exploration or development programs; provided
that the Funds may enter into futures contracts and futures options.
The following investment limitation is fundamental with respect to the
IT Tax-Exempt and LT Tax-Exempt Funds. The IT Tax-Exempt and LT Tax-Exempt Funds
may not:
13. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation.
The following investment limitation is fundamental with respect to the
Managed Income Fund. The Managed Income Fund may not:
-11-
<PAGE>
14. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years.
* * *
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts. The Funds do not
currently intend to invest in real estate investment trusts.
In addition to the above investment limitations, Excelsior Fund
currently intends to limit the IT Income and Managed Income Funds' investments
in warrants so that, valued at the lower of cost or market value, they do not
exceed 5% of a Fund's net assets. For the purpose of this limitation, warrants
acquired by the IT Income or Managed Income Fund in units or attached to
securities will be deemed to be without value.
The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.
The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities on
margin, short sales of securities and the maintenance of a short position; the
issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
-12-
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors, Inc., 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 financial institutions ("Shareholder Organizations"). Shares
are also offered for sale directly to institutional investors and to members of
the general public. Different types of Customer accounts at the Shareholder
Organizations may be used to purchase Shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically "sweep"
a Customer's account not less frequently than weekly and invest amounts in
excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in Shares selected by the Customer. Investors purchasing Shares may
include officers, directors, or employees of the particular Shareholder
Organization.
The Companies have authorized certain brokers to accept on their
behalf purchase, exchange and redemption orders. Such brokers are authorized to
designate other intermediaries to accept purchase, exchange and redemption
orders on behalf of the Companies. A Company will be deemed to have received a
purchase, exchange or redemption order when such an authorized broker or
designated intermediary accepts the order.
Shares of the Funds are offered for sale at their net asset value per
Share next computed after a purchase order is received in good order by the
Companies' sub-transfer agent or after a purchase order is accepted by an
authorized broker or designated intermediary. Similarly, an order for the
exchange or redemption of Shares will receive the net asset value per Share next
computed after the order is received in good order by the Companies' sub-
transfer agent or after the order is accepted by an authorized broker or
designated intermediary.
Prior to February 14, 1997, Shares of the Funds were offered for sale
with a maximum sales charge of 4.50%. For the fiscal years ended March 31, 1997
and 1996, total sales charges paid by shareholders with respect to the IT Tax-
Exempt Fund were $314 and $1,621, respectively; with respect to the LT Tax-
Exempt Fund were $8,085 and $15,633, respectively; and with respect to the
Managed Income Fund were $2,072 and $727, respectively. Of these respective
amounts, UST Distributors, Inc., the Funds' former distributor, retained $341
with respect to the IT Tax-Exempt Fund; $1,972 with respect to the LT Tax-Exempt
Fund; and $653 with respect to the Managed Income Fund for the period from April
1, 1995 through July 31, 1995. The Distributor retained none of the foregoing
sales charges with respect to the IT Tax-Exempt, LT Tax-Exempt and Managed
Income Funds for the fiscal year ended March 31, 1997, and for the period from
August 1, 1995 through March 31, 1996. The balance was paid to selling dealers.
-13-
<PAGE>
Total sales charges paid by shareholders of the Short-Term Tax-Exempt,
ST Government and IT Income Funds for the fiscal years ended March 31, 1997 and
1996 were $292 and $1,523; $0 and $0; and $0 and $299, respectively. Of these
respective amounts, UST Distributors, Inc., the Funds' former distributor,
retained $1,523 with respect to the Short-Term Tax-Exempt Fund; $0 with respect
to the ST Government Fund; and $20 with respect to the IT Income Fund for the
period from April 1, 1995 through July 31, 1995. The Distributor retained none
of the foregoing sales charges with respect to the Short-Term Tax-Exempt, ST
Government and IT Income Funds for the fiscal year ended March 31, 1997, and for
the period August 1, 1995 through March 31, 1996. The balance was paid to
selling dealers.
The Companies may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the Securities and Exchange Commission (the "SEC"); (b) the
Exchange is closed for other than customary weekend and holiday closings; (c)
the SEC has by order permitted such suspension; or (d) an emergency exists as
determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Each Company reserves the right to honor any request for redemption or
repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value. If payment is made
in securities, a shareholder may incur transaction costs in converting these
securities into cash. Such redemptions in kind will be governed by Rule 18f-1
under the 1940 Act so that a Fund is obligated to redeem its Shares solely in
cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder of a Fund.
Under certain circumstances, the Companies may, at their discretion,
accept securities as payment for Shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a bona fide
---- ----
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.
-14-
<PAGE>
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the investor
must deposit any outstanding certificates for Shares with Chase Global Funds
Services Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of a Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund involved if the amount of
the withdrawal payments exceeds the dividends and distributions paid on the
Shares and the appreciation of the investor's investment in the Fund. This in
turn may result in a complete depletion of the shareholder's investment. An
investor may not participate in a program of systematic investing in a Fund
while at the same time participating in the Systematic Withdrawal Plan with
respect to an account in that Fund. Customers of Shareholder Organizations may
obtain information on the availability of, and procedures and fees relating to,
the Systematic Withdrawal Plan directly from their Shareholder Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of any other portfolio of the
Companies or for Trust Shares of Excelsior Institutional Trust. Shares may be
exchanged by wire, telephone or mail and must be made to accounts of identical
registration. There is no exchange fee imposed by the Companies or Excelsior
Institutional Trust. In order to prevent abuse of this privilege to the
disadvantage of other shareholders, the Companies and Excelsior Institutional
Trust reserve the right to limit the number of exchange requests of investors to
no more than six per year. The Companies and Excelsior Institutional Trust may
modify or terminate the exchange program at any time upon 60 days' written
notice to shareholders, and may reject any exchange request. Customers of
Shareholder Organizations may obtain information on the availability of, and the
procedures and fees relating to, such program directly from their Shareholder
Organizations.
-15-
<PAGE>
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged Shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Other Investor Programs
- -----------------------
As described in the Prospectuses, Shares of the Funds may be purchased
in connection with the Automatic Investment Program. Shares of the Managed
Income, IT Income and ST Government Funds may also be purchased in connection
with certain Retirement Programs. Customers of Shareholder Organizations may
obtain information on the availability of, and the procedures and fees relating
to, such programs directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Excelsior Fund's Charter authorizes its Board of Directors to issue up
to thirty-five billion full and fractional shares of capital stock; Excelsior
Tax-Exempt Fund's Charter authorizes its Board of Directors to issue up to
fourteen billion full and fractional shares of capital stock. Both Charters
authorize the respective Boards of Directors to classify or reclassify any
unissued shares of the respective Companies into one or more additional classes
or series by setting or changing in any one or more respects their respective
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption. The Prospectuses describe the classes of shares into which the
Companies' authorized capital is currently classified. Prior to December 28,
1995, Excelsior Fund and Excelsior Tax-Exempt Fund were known as "UST Master
Funds, Inc." and "UST Master Tax-Exempt Funds, Inc.," respectively.
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued for
payment as described in the Prospectuses, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, shareholders
of that Fund are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the portfolios of the Company involved, of any general assets of
that Company not belonging to any particular portfolio of that Company which are
available for distribution. In the
-16-
<PAGE>
event of a liquidation or dissolution of either Company, shareholders of such
Company will be entitled to the same distribution process.
Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of a
Company's outstanding shares may elect all of that Company's directors,
regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants and the election of
directors may be effectively acted upon by shareholders of each Company voting
without regard to class.
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The exercise
of such authority by the Boards of Directors will be subject to the provisions
of the 1940 Act, and the Boards of Directors will not take any action described
in this paragraph unless the proposed action has been disclosed in writing to
the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Companies' Common Stock (or of the Shares of a Fund voting separately as
a class) in connection with any corporate action, unless otherwise provided by
law (for example, by Rule
-17-
<PAGE>
18f-2, discussed above) or by the Companies' Charters, the Companies may take or
authorize such action upon the favorable vote of the holders of more than 50% of
the outstanding Common Stock of the particular Company voting without regard to
class.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
- ----------------------
The directors and executive officers of the Companies, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:
-18-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Position with Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ---------------------------
<S> <C> <C>
Frederick S. Wonham\1\ Chairman of the Board, Retired; Director of Excelsior Fund and
238 June Road President and Treasurer Excelsior Tax-Exempt Fund (since 1995); Trustee
Stamford, CT 06903 of Excelsior Funds and Excelsior Institutional
Age: 67 Trust (since 1995); Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York (from
February 1990 until September 1995); and
Chairman, U.S. Trust Connecticut (from March
1993 to May 1997).
Donald L. Campbell Director Retired; Director of Excelsior Fund and
333 East 69th Street Excelsior Tax-Exempt Fund (since 1984);
Apt. 10-H Director of UST Master Variable Series, Inc.
New York, NY 10021 (from 1994 to June 1997); Trustee of Excelsior
Age: 72 Institutional Trust (since 1995); and Director,
Royal Life Insurance Co. of New York (since
1991).
Rodman L. Drake Director Director of Excelsior Fund and Excelsior
Continuation Investments Tax-Exempt Fund (since 1996); Trustee of
Group, Inc. Excelsior Institutional Trust and Excelsior
1251 Avenue of the Americas, Funds (since 1994); Director, Parsons
9th Floor Brinkerhoff Energy Services Inc. (since 1996);
New York, NY 10020 Director, Parsons Brinkerhoff, Inc.
Age: 55 (engineering firm) (since 1995); President,
Continuation Investments Group, Inc. (since
1997); President, Mandrake Group (investment
and consulting firm) (1994-1997); Director,
Hyperion Total Return Fund, Inc. and four other
funds for which Hyperion Capital Management,
Inc. serves as investment adviser (since 1991);
Co-Chairman, KMR Power Corporation (power
plants) (form 1993 to 1996); Director, The
Latin America Smaller Companies Fund, Inc.
(since 1993); Member of Advisory Board,
Argentina Private Equity Fund L.P. (from 1992
to 1996) and Garantia L.P. (Brazil) (from 1993
to 1996); and Director, Mueller Industries,
Inc. (from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of Excelsior Fund and
</TABLE>
1. This director is considered to be an "interested person" of Excelsior Fund
and Excelsior Tax-Exempt Fund as defined in the 1940 Act.
-19-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Position with Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ---------------------------
<S> <C> <C>
913 Franklin Lake Road Excelsior Tax-Exempt Fund (since 1984);
Franklin Lakes, NJ 07417 Director of UST Master Variable Series, Inc.
Age: 73 (from 1994 to June 1997); and Trustee of
Excelsior Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior Fund and
2320 Cumberland Road Excelsior Tax-Exempt Fund (since 1986);
Charlottesville, VA 22901 Director of UST Master Variable Series, Inc.
Age: 77 (from 1994 to June 1997); Trustee of Excelsior
Institutional Trust (since 1995); Director,
Deutsche Bank Financial, Inc. (since 1989);
Director, The Harbus Corporation (since 1951);
and Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1988).
W. Wallace McDowell, Jr. Director Director of Excelsior Fund and Excelsior
c/o Prospect Capital Corp. Tax-Exempt Fund (since 1996); Trustee of
43 Arch Street Excelsior Institutional Trust and Excelsior
Greenwich, CT 06830 Funds (since 1994); Private Investor (since
Age: 61 1994); Managing Director, Morgan Lewis Githens
& Ahn (from 1991 to 1994); and Director, U.S.
Homecare Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children's Discovery
Centers (since 1984), ITI Technologies, Inc.
(since 1992) and Jack Morton Productions (since
1987).
Jonathan Piel Director Director of Excelsior Fund and Excelsior
558 E. 87th Street Tax-Exempt Fund (since 1996); Trustee of
New York, NY 10128 Excelsior Institutional Trust and Excelsior
Age: 59 Funds (since 1994); Vice President and Editor,
Scientific American, Inc. (from 1986 to 1994);
Director, Group for The South Fork,
Bridgehampton, New York (since 1993); and
Member, Advisory Committee, Knight Journalism
Fellowships, Massachusetts Institute of
Technology (since 1984).
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Position with Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ---------------------------
<S> <C> <C>
Robert A. Robinson Director Director of Excelsior Fund and Excelsior
Church Pension Fund Tax-Exempt Fund (since 1987); Director of UST
800 Second Avenue Master Variable Series, Inc. (from 1994 to June
New York, NY 10017 1997); Trustee of Excelsior Institutional Trust
Age: 72 (since 1995); President Emeritus, The Church
Pension Fund and its affiliated companies
(since 1966); Trustee, H.B. and F.H. Bugher
Foundation and Director of its wholly owned
subsidiaries -- Rosiclear Lead and Flourspar
Mining Co. and The Pigmy Corporation (since
1984); Director, Morehouse Publishing Co.
(1974-1998); Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and Director,
Infinity Funds, Inc. (since 1995).
Alfred C. Tannachion/1/ Director Retired; Director of Excelsior Fund and
6549 Pine Meadows Drive Excelsior Tax-Exempt Fund (since 1985);
Spring Hill, FL 34606 Chairman of the Board of Excelsior Fund and
Age: 72 Excelsior Tax-Exempt Fund (1991-1997) and
Excelsior Institutional Trust (1996-1997);
President and Treasurer of Excelsior Fund and
Excelsior Tax-Exempt Fund (1994-1997) and
Excelsior Institutional Trust (1996-1997);
Chairman of the Board, President and Treasurer
of UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).
</TABLE>
1. This director is considered to be an "interested person" of Excelsior Fund
and Excelsior Tax-Exempt Fund as defined in the 1940 Act.
-21-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Position with Past 5 Years and
Name and Address the Companies Other Affiliations
- ---------------- ------------- ---------------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
Philadelphia National Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
Philadelphia National Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 39
Edward Wang Assistant Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Secretary Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 37
John M. Corcoran Assistant Vice President, Director of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (since April 1998); Vice President,
73 Tremont Street Senior Manager of Fund Administration, Chase
Boston, MA 02108-3913 Global Funds Services Company (from July 1996
Age: 33 to April 1998); Second Vice President, Manager
of Fund Administration, Chase Global Funds
Services Company (from October 1993 to July
1996); and Audit Manager, Ernst & Young LLP
(from August 1987 to September 1993).
</TABLE>
-22-
<PAGE>
Each director receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to the Companies. The employees of
Chase Global Funds Services Company do not receive any compensation from the
Companies for acting as officers of the Companies. No person who is currently
an officer, director or employee of the Investment Adviser serves as an officer,
director or employee of the Companies. As of July 8, 1998, the directors and
officers of each Company as a group owned beneficially less than 1% of the
outstanding shares of each fund of each Company, and less than 1% of the
outstanding shares of all funds of each Company in the aggregate.
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal year.
-23-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from the Companies
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Companies Expenses to Directors
--------------- ----------------- ---------- ------------------
<S> <C> <C> <C>
Donald L. Campbell $33,000 None $38,000(3)**
Director
Rodman L. Drake $30,000 None $39,500(4)**
Director
Joseph H. Dugan $33,000 None $38,000(3)**
Director
Wolfe J. Frankl $31,500 None $36,500(3)**
Director
W. Wallace McDowell, Jr. $28,500 None $38,000(4)**
Director
Jonathan Piel $33,000 None $43,000(4)**
Director
Robert A. Robinson $33,000 None $38,000(3)**
Director
Alfred C. Tannachion $33,000 None $38,000(3)**
Director
Frederick S. Wonham $43,000 None $53,000(4)**
Chairman of the Board,
President and Treasurer
</TABLE>
- ---------------------------
* The "Fund Complex" consists of Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
-24-
<PAGE>
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively
with U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as
Investment Adviser to the Funds. In the Investment Advisory Agreements, U.S.
Trust has agreed to provide the services described in the Prospectuses. The
Investment Adviser has also agreed to pay all expenses incurred by it in
connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, if any, purchased for the
Funds.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Funds pursuant to an advisory agreement substantially similar to
the Investment Advisory Agreement currently in effect for the Funds.
For the fiscal year ended March 31, 1998, the particular Company paid
U.S. Trust advisory fees of $72,860, $260,708, $1,203,851, $99,010, $746,025 and
$545,298 with respect to the ST Government, IT Income, Managed Income, Short-
Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively. For the
same period, U.S. Trust waived advisory fees totaling $21,549, $42,260,
$243,873, $24,358, $133,635 and $89,459 with respect to the ST Government, IT
Income, Managed Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt
Funds, respectively.
For the fiscal year ended March 31, 1997, the particular Company paid
U.S. Trust New York advisory fees of $63,713, $217,254, $1,185,427, $95,564,
$741,452 and $457,137 with respect to the ST Government, IT Income, Managed
Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, U.S. Trust New York waived advisory fees
totaling $21,478, $35,586, $77,751, $28,208, $140,769 and $69,305 with respect
to the ST Government, IT Income, Managed Income, Short-Term Tax-Exempt, IT Tax-
Exempt and LT Tax-Exempt Funds, respectively.
For the fiscal year ended March 31, 1996, the particular Company paid
U.S. Trust New York advisory fees of $46,513, $187,185, $602,962, $116,249,
$754,048 and $391,724 with respect to the ST Government, IT Income, Managed
Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, U.S. Trust New York waived advisory fees
totaling $20,410, $22,783, $46,807, $26,523, $117,024 and $47,791 with respect
to the ST Government, IT Income, Managed Income, Short-Term Tax-Exempt, IT Tax-
Exempt and LT Tax-Exempt Funds, respectively.
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The Investment Advisory Agreements provide that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the performance of such agreements,
except that the Investment Adviser shall be jointly, but not severally, liable
for a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder. In addition, the Investment Adviser has undertaken
in the Investment Advisory Agreement to maintain its policy and practice of
conducting its Asset Management Group independently of its Banking Group.
Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services, an affiliate of the Distributor, and U.S. Trust
Connecticut (the "Administrators") serve as the Funds' administrators. Under
the Administration Agreements, the Administrators have agreed to maintain office
facilities for the Funds, furnish the Funds with statistical and research data,
clerical, accounting and bookkeeping services, and certain other services
required by the Funds, and to compute the net asset value, net income, "exempt
interest dividends" and realized capital gains or losses, if any, of the
respective Funds. The Administrators prepare semiannual reports to the SEC,
prepare Federal and state tax returns, prepare filings with state securities
commissions, arrange for and bear the cost of processing Share purchase and
redemption orders, maintain the Funds' financial accounts and records, and
generally assist in the Funds' operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Funds' administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Funds. Prior to August 1, 1995, administrative
services were provided to the Funds by CGFSC and Concord Holding Corporation
(collectively, the "former administrators") under administration agreements
having substantially the same terms as the Administration Agreements currently
in effect.
For the fiscal year ended March 31, 1998, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust $62,813, $383,863
and $189,687 in the aggregate with respect to the Short-Term Tax-Exempt, IT Tax-
Exempt and LT Tax-Exempt Funds, respectively. For the same period, Excelsior
Fund paid CGFSC, Federated Administrative Services and U.S. Trust $48,138,
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$132,050 and $294,955 in the aggregate with respect to the ST Government, IT
Income and Managed Income Funds, respectively. For the same period, CGFSC,
Federated Administrative Services and U.S. Trust waived fees totaling $11, $390,
$381, $104, $674 and $4,549 with respect to the ST Government, IT Income,
Managed Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.
For the fiscal year ended March 31, 1997, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust New York $63,343,
$387,111 and $160,259 in the aggregate with respect to the Short-Term Tax-
Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively. For the same
period, Excelsior Fund paid CGFSC, Federated Administrative Services and U.S.
Trust New York $43,657, $110,146 and $258,438 in the aggregate with respect to
the ST Government, IT Income and Managed Income Funds, respectively. For the
same period, CGFSC, Federated Administrative Services and U.S. Trust New York
waived fees totaling $1, $909, $468, $96, $489 and $1,651 with respect to the ST
Government, IT Income, Managed Income, Short-Term Tax-Exempt, IT Tax-Exempt and
LT Tax-Exempt Funds, respectively.
For the period August 1, 1995 through March 31, 1996, Excelsior Tax-
Exempt Fund paid CGFSC, Federated Administrative Services and U.S. Trust New
York $33,906, $258,662 and $91,594 in the aggregate with respect to the Short-
Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively. For the
same period, Excelsior Fund paid CGFSC, Federated Administrative Services and
U.S. Trust New York $38,330, $64,035 and $89,196 in the aggregate with respect
to the ST Government, IT Income and Managed Income Funds, respectively. For the
same period, CGFSC, Federated Administrative Services and U.S. Trust New York
waived administration fees totaling $30, $1,567, $412, $15,466, $494 and $1,782
with respect to the ST Government, IT Income, Managed Income, Short-Term Tax-
Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively.
For the period April 1, 1995 through July 31, 1995, Excelsior Tax-
Exempt Fund paid the former administrators $23,993, $124,638 and $41,586 in the
aggregate with respect to the Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-
Exempt Funds, respectively. For the same period, Excelsior Fund paid the former
administrators $11,576, $26,526 and $43,727 in the aggregate with respect to the
ST Government, IT Income and Managed Income Funds, respectively. For the same
period, the former administrators waived administration fees totaling $64, $543,
$474, $140, $820 and $160 with respect to the ST Government, IT Income, Managed
Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.
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Shareholder Organizations
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As stated in the Prospectus, each Company has entered into agreements
with certain Shareholder Organizations. Such agreements require the Shareholder
Organizations to provide shareholder administrative services to their Customers
who beneficially own Shares in consideration for a Fund's payment of not more
than the annual rate of 0.40% of the average daily net assets of the Fund's
Shares beneficially owned by Customers of the Shareholder Organization. Such
services may include: (a) acting as recordholder of Shares; (b) assisting in
processing purchase, exchange and redemption transactions; (c) providing
periodic statements showing a Customer's account balances and confirmations of
transactions by the Customer; (d) providing tax and dividend information to
shareholders as appropriate; (e) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Companies to Customers;
and (f) providing or arranging for the provision of other related services.
The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Directors").
Any material amendment to a Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the
Companies' arrangements with Shareholder Organizations are in effect, the
selection and nomination of the members of the Companies' Boards of Directors
who are not "interested persons" (as defined in the 1940 Act) of the Companies
will be committed to the discretion of such Disinterested Directors.
For the fiscal years ended March 31, 1998, 1997 and 1996, payments to
Shareholder Organizations under the Plans totaled $24,462, $28,304 and $26,684;
$134,309, $141,258 and $118,114; $94,008, $70,956 and $22,586; $19,835, $21,479
and $20,504; $42,650, $36,495 and $24,893; and $51,215, $78,219 and $47,693 with
respect to the Short-Term Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST
Government, IT Income and Managed Income Funds, respectively. Of these
respective amounts, $24,157, $28,304 and $26,684; $131,684, $139,275 and
$115,826; $78,373, $68,722 and $22,586; $19,800, $21,479 and $20,504; $41,041,
$36,495 and $21,217; and $48,468, $77,550 and $46,426 were paid to affiliates of
U.S. Trust with respect to the Short-Term Tax-Exempt, IT Tax-Exempt, LT Tax-
Exempt, ST Government, IT Income and Managed Income Funds, respectively.
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Expenses
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Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Funds bear the expenses incurred in their operations. Expenses
of the Funds include: taxes; interest; fees (including fees paid to the
Companies' directors and officers who are not affiliated with the Distributor or
the Administrators); SEC fees; state securities qualification fees; costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders; advisory, administration and administrative servicing fees;
charges of the custodian, transfer agent and dividend disbursing agent; certain
insurance premiums; outside auditing and legal expenses; cost of independent
pricing service; costs of shareholder reports and meetings; and any
extraordinary expenses. The Funds also pay for any brokerage fees and
commissions in connection with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase") serves as custodian of the Funds'
assets. Under the Custodian Agreements, Chase has agreed to: (i) maintain a
separate account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive income
and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to each Company's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreements, notwithstanding any delegation.
U.S. Trust New York serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem Shares; (ii) address and mail all communications by the Funds
to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for their meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to
each Company's Board of Directors concerning the Funds' operations. For its
transfer agency, dividend disbursing, and subaccounting services, U.S. Trust New
York is entitled to receive $15.00 per annum per account and subaccount. In
addition, U.S. Trust New York is entitled to be reimbursed for its out-of-pocket
expenses for the cost of forms, postage, processing purchase and redemption
orders, handling of proxies, and other similar expenses in connection with the
above services.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreements, notwithstanding any delegation. Pursuant to this provision in the
agreements, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are
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not Customers of U.S. Trust New York. For the services provided by CGFSC, U.S.
Trust New York has agreed to pay CGFSC $15.00 per annum per account or
subaccount plus out-of-pocket expenses. CGFSC receives no fee directly from the
Companies for any of its sub-transfer agency services. U.S. Trust New York may,
from time to time, enter into sub-transfer agency arrangements with third party
providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Investment Adviser is responsible for, makes decisions with respect to and
places orders for all purchases and sales of portfolio securities of each of the
Funds. Purchases and sales of portfolio securities will usually be principal
transactions without brokerage commissions.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Funds' turnover rates may
remain higher than those of many other investment companies with similar
investment objectives and policies. However, since brokerage commissions are
not normally paid on instruments purchased by the Funds, portfolio turnover is
not expected to have a material effect on the net income of any of the Funds.
The Funds' portfolio turnover rate may also be affected by cash requirements for
redemptions of Shares and by regulatory provisions which enable the Funds to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. See "Financial Highlights" in
the Prospectuses for the Funds' portfolio turnover rates.
The Managed Income Fund's portfolio was restructured during the fiscal
year ended March 31, 1998 following a change in such Fund's portfolio manager in
August 1997. As a result, the Fund's portfolio turnover rate for the year was
substantially higher than the turnover rates for prior fiscal years. The
Investment Adviser expects that the Fund's portfolio turnover rate for the
current fiscal year will be consistent with its historical average.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or markdown. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with dealers who make a market in the securities involved, except in
those situations where better prices and execution are available elsewhere.
The Investment Advisory Agreements between the Companies and the
Investment Adviser provide that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The
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Investment Adviser shall consider factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer and whether such
broker or dealer is selling shares of the Companies, and the reasonableness of
the commission, if any, for the specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreements authorize the
Investment Adviser, to the extent permitted by law and subject to the review of
the Companies' Boards of Directors from time to time with respect to the extent
and continuation of the policy, to cause the Funds to pay a broker which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker for effecting the same transaction, provided
that the Investment Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular transaction
or the overall responsibilities of the Investment Adviser to the accounts as to
which it exercises investment discretion. Such brokerage and research services
might consist of reports and statistics on specific companies or industries,
general summaries of groups of stocks and their comparative earnings, or broad
overviews of the stock market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fee payable by the Funds. Such
information may be useful to the Investment Adviser in serving the Funds and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Distributor, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the SEC.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Funds. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Funds
and another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Investment Adviser believes to be equitable to the Funds and
such other investment company or common trust fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Funds or the size of the position obtained by the Funds. To the extent
permitted by law, the Investment Adviser may aggregate the securities to be sold
or purchased for the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 1998, the
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Managed Income Fund held the following securities of Excelsior Fund's regular
brokers or dealers or their parents: a corporate bond issued by Morgan Stanley
Dean Witter & Co. with a principal amount of $5,000,000; a corporate bond issued
by Goldman Sachs Group with a principal amount of $5,000,000; and a corporate
bond issued by Lehman Brothers Holdings with a principal amount of $5,000,000.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectuses and the financial statements for the fiscal year
ended March 31, 1998 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, is counsel to the Companies and will pass upon the legality
of the Shares offered by the Prospectuses.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
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The following supplements the tax information contained in the
Prospectuses.
Each of the Funds is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. If, for any reason, a Fund does not qualify
for a taxable year for the special Federal tax treatment afforded regulated
investment companies, such Fund would be subject to Federal tax on all of its
taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether or
not derived from interest on Municipal Securities) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.
Each Fund intends to designate any distribution of the excess of net
long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to shareholders within 60 days after the
close of the Fund's taxable year. Shareholders should note that, upon the sale
or exchange of Shares, if the shareholder has not held such Shares
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for at least six months, any loss on the sale or exchange of those Shares will
be treated as long-term capital loss to the extent of the capital gain dividends
received with respect to the Shares.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."
Tax-Exempt Funds
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As stated in their Prospectus, the Tax-Exempt Funds are not intended
to constitute a balanced investment program and are not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Tax-Exempt Funds would not be suitable
for tax-exempt institutions and may not be suitable for retirement plans
qualified under Section 401 of the Code, H.R. 10 plans and individual retirement
accounts because such plans and accounts are generally tax-exempt and,
therefore, not only would not gain any additional benefit from the Tax-Exempt
Funds' dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Tax-
Exempt Funds may not be an appropriate investment for entities which are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under the Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, who occupies more than 5% of
the usable area of such facilities or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. "Related persons"
include certain related natural persons, affiliated corporations, a partnership
and its partners and an S corporation and its shareholders.
In order for a Tax-Exempt Fund to pay exempt-interest dividends for
any taxable year, at least 50% of the aggregate value of such Fund's portfolio
must consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, each of the
Tax-Exempt Funds will notify its shareholders of the portion of the dividends
paid by that Fund which constitutes an exempt-interest dividend with respect to
such taxable year. However, the aggregate amount of dividends so designated by
that Fund cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code
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received by that Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of total
dividends paid by each of the Tax-Exempt Funds with respect to any taxable year
which qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends from that Tax-Exempt Fund for such year.
Interest on indebtedness incurred by a shareholder to purchase or
carry a Tax-Exempt Fund's Shares generally is not deductible for Federal income
tax purposes. In addition, if a shareholder holds Tax-Exempt Fund Shares for
six months or less, any loss on the sale or exchange of those Shares will be
disallowed to the extent of the amount of exempt-interest dividends received
with respect to the Shares. The Treasury Department, however, is authorized to
issue regulations reducing the six-month holding requirement to a 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.
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* * *
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
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PERFORMANCE AND YIELD INFORMATION
---------------------------------
Yields and Performance
- ----------------------
The Funds may advertise the standardized effective 30-day (or one
month) yields calculated in accordance with the method prescribed by the SEC for
mutual funds. Such yield will be calculated separately for each Fund according
to the following formula:
a-b
Yield = 2 [(-------- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = average daily number of Shares outstanding that
were entitled to receive dividends.
d = maximum offering price per Share on the last day
of the period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), each of the Funds computes the yield to maturity
of any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. Each of
the Funds calculates interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by each of the Funds to all shareholder accounts and
to the particular series of Shares in proportion to the length of the base
period and that Fund's mean (or median) account
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size. Undeclared earned income will be subtracted from the maximum offering
price per Share (variable "d" in the formula).
Based on the foregoing calculations, the effective yields for Shares
of the Short-Term Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT
Income and Managed Income Funds for the 30-day period ended March 31, 1998 were
3.34%, 3.70%, 4.28%, 5.01%, 5.31% and 5.15%, respectively.
The "tax-equivalent" yield of the Short-Term Tax-Exempt, IT Tax-Exempt
and LT Tax-Exempt Funds is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from Federal income tax by one minus a
stated Federal income tax rate and (b) adding that figure to that portion, if
any, of the yield that is not exempt from Federal income tax. Tax-equivalent
yields assume the payment of Federal income taxes at a rate of 31%. Based on
the foregoing calculations, the tax-equivalent yields of the Short-Term Tax-
Exempt, IT Tax-Exempt and LT Tax-Exempt Funds for the 30-day period ended March
31, 1998 were 4.84%, 5.36% and 6.20%, respectively.
Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV 1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
years.
Each Fund may also advertise the "aggregate total return" for its
Shares, which is computed by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
-38-
<PAGE>
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per Share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV', in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Based on the foregoing calculations, the total returns for Shares of
the Short-Term Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT
Income and Managed Income Funds for the one year period ended March 31, 1998
were 5.01%, 8.81%, 12.18%, 6.47%, 11.37% and 12.79%, respectively. The average
annual total returns for the Short-Term Tax-Exempt, IT Tax-Exempt, LT Tax-
Exempt, ST Government, IT Income and Managed Income Funds for the five year
period ended March 31, 1998 were 3.99%, 6.09%, 8.01%, 4.96%, 6.13% and 6.61%,
respectively. The average annual total returns for the IT Tax-Exempt, LT Tax-
Exempt and Managed Income Funds for the ten year period ended March 31, 1998
were 7.16%, 9.62% and 9.12%, respectively.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in Shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.
The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data
-39-
<PAGE>
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
and Weisenberger Investment Company Service. Total return and yield data as
reported in national financial publications such as Money Magazine, Forbes,
----- -------- ------
Barron's, The Wall Street Journal and The New York Times, or in publications of
- -------- --- ---- ------ ------- --- --- ---- -----
a local or regional nature, may also be used in comparing the performance of a
Fund. Advertisements, sales literature or reports to shareholders may from time
to time also include a discussion and analysis of each Fund's performance,
including without limitation, those factors, strategies and technologies that
together with market conditions and events, materially affected each Fund's
performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciations of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Investment
Adviser as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, Treasury bills and Shares of a
Fund. In addition, advertisement, sales literature or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund. Such advertisements or communicators may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
-------------
As used in the Prospectuses, "assets belonging to a Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company involved not belonging to a particular portfolio of that
Company. In determining the net asset value of a Fund's Shares, assets
belonging to the Fund are charged with the direct liabilities in respect of that
Fund and with a share of the general liabilities of the Company involved which
are normally allocated in proportion to the relative asset values of the
Company's portfolios at the time of allocation. Subject to the provisions of
the Companies' Charters, determinations by the Boards of Directors
-40-
<PAGE>
as to the direct and allocable liabilities and the allocable portion of any
general assets with respect to a particular Fund are conclusive.
As of July 8, 1998, U.S. Trust and its affiliates held of record
substantially all of the Companies' outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.
As of July 8, 1998, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding shares
of a Fund were as follows: Short-Term Government Securities Fund:
-------------------------------------
International Planned Parenthood, c/o United States Trust Company of New York,
114 West 47th Street, New York, New York 10036, 6.65%; United States Trust
Company of New York Trustee, FBO U.S. Trust Plan, c/o U.S. Trust Company of The
Pacific Northwest, Attn: Jill Williams, 4380 S.W. Macadam Ave., Suite 450,
Portland, Oregon 97201, 9.28%; and President and Director of Gonzaga College,
Attn: Dan Lahart, 19 Eye Street, N.W., Washington, D.C. 20001, 7.45%; Managed
-------
Income Fund: U.S. Trust Retirement Fund, c/o United States Trust Company of New
- -----------
York, 114 West 47th Street, New York, New York 10036, 39.35%; and United States
Trust Company of New York Trustee, FBO U.S. Trust Plan, Attn: Jill Williams,
4380 S.W. Macadam Ave., Suite 450, Portland, Oregon 97201, 5.56%; and Long-Term
---------
Tax-Exempt Fund: Charles Schwab & Co., Inc., Special Custody A/C for Benefit of
- ---------------
Customers, Attn: Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104,
7.44%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in the Companies'
Annual Reports to Shareholders for the fiscal year ended March 31, 1998 (the
"1998 Annual Reports") for the Funds are incorporated in this Statement of
Additional Information by reference. No other parts of the 1998 Annual Reports
are incorporated by reference herein. The financial statements included in the
1998 Annual Reports for the ST Government, IT Income, Managed Income, Short-Term
Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds have been audited by the
Companies' independent auditors, Ernst & Young LLP, whose reports thereon also
appear in the 1998 Annual Reports and are incorporated herein by reference.
Such financial statements have been incorporated herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing. Additional copies of the 1998 Annual Reports may be obtained at no
charge by telephoning CGFSC at the telephone number appearing on the front page
of this Statement of Additional Information.
-41-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace
A-1
<PAGE>
period has not expired, unless S&P believes such payments will be made during
such grace period. The "D" rating will also be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
A-2
<PAGE>
"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 issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
A-3
<PAGE>
"B" - Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
A-4
<PAGE>
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet
A-5
<PAGE>
its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation 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 or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - 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
A-6
<PAGE>
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 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in 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.
A-7
<PAGE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong
A-8
<PAGE>
capacity for timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
A-9
<PAGE>
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-10
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
A-11
<PAGE>
"MIG-1"/"VMIG-1" - This designation denotes 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" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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 good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-12
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
New York Intermediate-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the New York Intermediate-Term
Tax-Exempt Fund (the "Fund") of Excelsior Tax-Exempt Funds, Inc. ("Excelsior
Tax-Exempt Fund") dated August 1, 1998 (the "Prospectus"). Much of the
information contained in this Statement of Additional Information expands upon
the subjects discussed in the Prospectus. No investment in shares of the Fund
("Shares") should be made without reading the Prospectus. A copy of the
Prospectus may be obtained by writing Excelsior Tax-Exempt Fund c/o Chase Global
Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling
(800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES............................................1
Additional Information on Portfolio Instruments........................1
Special Considerations Relating to New York Municipal Obligations......6
Additional Investment Limitations.....................................18
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................19
INVESTOR PROGRAMS...........................................................21
Systematic Withdrawal Plan.............................................21
Exchange Privilege.....................................................21
Other Investor Programs................................................22
DESCRIPTION OF CAPITAL STOCK................................................22
MANAGEMENT OF THE FUND......................................................24
Directors and Officers.................................................24
Investment Advisory and Administration Agreements......................29
Shareholder Organizations..............................................31
Expenses...............................................................32
Custodian and Transfer Agent...........................................32
PORTFOLIO TRANSACTIONS......................................................33
INDEPENDENT AUDITORS........................................................35
COUNSEL.....................................................................35
ADDITIONAL INFORMATION CONCERNING TAXES.....................................35
Federal................................................................35
PERFORMANCE AND YIELD INFORMATION...........................................37
MISCELLANEOUS...............................................................40
FINANCIAL STATEMENTS........................................................41
APPENDIX A.................................................................A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The investment objective and policies of the Fund are described in the
Prospectus. The following information supplements the description of the
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 regular Federal income tax and not treated as a specific
tax preference item under the Federal alternative minimum tax.
The two principal classifications of Municipal Obligations are
"general obligation" and "revenue" issues, but the Fund's portfolio may also
include "moral obligation" issues. 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 nationally recognized statistical rating
organizations ("NRSROs") such as Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Services ("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 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 ("U.S. Trust New York") and U.S. Trust Company of Connecticut ("U.S.
Trust Connecticut" and, collectively with U.S. Trust New York, "U.S. Trust" or
the "Investment Adviser") will consider such an event in determining whether the
Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Fund will depend upon the ability of the issuers to meet their obligations.
Each state, the District of Columbia, each of their political subdivisions,
agencies, instrumentalities and authorities, and each multistate agency of which
a state is a member, is a separate "issuer" as that term is used in this
Statement of Additional Information and the Fund's Prospectus. An issuer's
obligations under its Municipal Obligations are subject to the provisions of
bankruptcy, insolvency, and
<PAGE>
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.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
the Investment Adviser will review the proceedings relating to the issuance of
Municipal Obligations or the bases for such opinions.
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.
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
-2-
<PAGE>
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-3" or higher by S&P or "Prime-3" 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.
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, as
amended (the "1940 Act").
When-Issued and Forward Transactions
------------------------------------
When the Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. Because the Fund will set aside cash or liquid assets
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and ability to manage its portfolio might be affected in the event its
forward commitments or commitments to purchase "when-issued" securities ever
exceeded 25% of the value of its assets.
The Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases, the Fund may realize a taxable
capital gain or loss.
When the Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
-3-
<PAGE>
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held by it. Under a "stand-by commitment," a dealer or bank agrees
to purchase from the Fund, at the Fund's option, specified Municipal Obligations
at a specified price. The amount payable to the Fund upon its exercise of a
"stand-by commitment" is normally (i) the Fund's acquisition cost of the
Municipal Obligations (excluding any accrued interest which the Fund paid on
their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. "Stand-by commitments" are
exercisable by the Fund at any time before the maturity of the underlying
Municipal Obligations, and may be sold, transferred or assigned by the Fund only
with the underlying instruments.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for securities which are acquired
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities). Where the Fund has paid any consideration
directly or indirectly for a "stand-by commitment," its cost will be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
The Fund intends to enter into "stand-by commitments" only with banks
and broker/dealers which, in the Investment Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Investment Adviser will review periodically the issuer's
assets, liabilities, contingent claims and other relevant financial information.
Futures Contracts
-----------------
The Fund may invest in interest rate futures contracts and municipal
bond index futures contracts. Futures contracts will not be entered into for
speculative purposes, but to hedge risks associated with the Fund's securities
investments. Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when it
-4-
<PAGE>
may be disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge.
Successful use of futures by the Fund is also subject to the
Investment Adviser's ability to correctly predict movements in the direction of
the market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
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.
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.
-5-
<PAGE>
Miscellaneous
-------------
The Fund may not invest in oil, gas, or mineral leases.
Special Considerations Relating to New York Municipal Obligations
- -----------------------------------------------------------------
Some of the significant financial considerations relating to the
Fund's investments in New York Municipal Obligations are summarized below. This
summary information is not intended to be a complete description and is
principally derived from official statements relating to issues of New York
Municipal Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy. New York State (the "State") is the third most populous state in
- -------------
the nation and has a relatively high level of personal wealth. The State's
economy is diverse with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a very
small share of the nation's farming and mining activity. The State has a
declining proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries. New York City (the
"City"), which is the most populous city in the State and nation and is the
center of the nation's largest metropolitan area, accounts for a large portion
of the State's population and personal income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially.
Moderate growth is projected to continue in 1998 and 1999 for
employment, wages, and personal income, although the growth rates will lessen
gradually during the course of the two years. Overall employment growth is
expected to continue at a modest rate, reflecting the slowing growth in the
national economy, continued spending restraint in government, and restructuring
in the health care, social service, and banking sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the "Governor") to
- ------------
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is
-6-
<PAGE>
required to submit to the Legislature quarterly budget updates which include a
revised cash-basis state financial plan, and an explanation of any changes from
the previous state financial plan.
The State's budget for the 1997-98 fiscal year was adopted by the
Legislature on August 4, 1997, more than four months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for State-supported debt
service. The State Financial Plan for the 1997-98 fiscal year was formulated on
August 11, 1997 and was based on the State's budget as enacted by the
Legislature, as well as actual results for the first quarter of the current
fiscal year (the "1997-98 State Financial Plan"). In recent years, the State
has failed to adopt a budget prior to the beginning of its fiscal year. There
can be no assurance that State budgets in future fiscal years will be adopted by
the April 1 statutory deadline.
The Governor is required by law to propose a balanced budget each
year. In order to address any potential remaining budget gap, the Governor is
expected to make additional proposals to bring receipts in line with
disbursements. The State has closed projected budget gaps of $5.0 billion, $3.9
billion and $2.3 billion in its 1995-96, 1996-97 and 1997-98 fiscal years,
respectively.
The 1997-98 General Fund Financial Plan is projected to be balanced on
a cash basis, with a projected cash surplus of $1.83 billion. As compared to
the Governor's Executive Budget as amended in February 1997, the State's adopted
budget for 1997-98 increased General Fund spending by $1.7 billion, primarily
from increases for local assistance ($1.3 billion). Resources used to fund
these additional expenditures include increased revenues projected for the 1997-
98 fiscal year, increased resources produced in the 1996-97 fiscal year that
will be utilized in 1997-98, re-estimates of social service, fringe benefit and
other spending, and certain non-recurring resources.
The 1997-98 adopted budget includes multi-year reductions, including a
State funded property and local income tax reduction program, estate tax relief,
utility gross receipts tax reductions, permanent reductions in the State sales
tax on clothing, and elimination of assessments on medical providers. These
reductions are intended to reduce the overall level of State and local taxes in
New York and to improve the State's competitive position vis-a-vis other states.
The various elements of the State and local tax and assessments reductions have
little or no impact on the 1997-98 State Financial Plan, and do not begin to
materially affect the outyear projections until the State's 1999-2000 fiscal
year.
Other actions taken in the 1997-98 adopted budget add further pressure
to future budget balance in New York State. For example, the fiscal effects of
tax reductions adopted in the 1997-98 budget are projected to grow more
substantially beyond the 1998-99 fiscal year, with incremental costs averaging
in excess of $1.3 billion annually over the last three years of the tax
reduction program. These incremental costs reflect the phase-in of State-funded
school property tax and local income tax relief; the phase-out of the
assessments on medical providers; and reductions in estate and gift levies,
utility gross
-7-
<PAGE>
receipts taxes, and the State sales tax on clothing. The full annual cost of the
enacted tax reduction package is estimated at approximately $4.8 billion when
fully effective in State fiscal year 2001-02. In addition, the 1997-98 budget
included multi-year commitments for school aid and pre-kindergarten early
learning programs which could add as much as $1.4 billion in costs when fully
annualized in fiscal year 2001-02. These spending commitments are subject to
annual appropriation.
On September 11, 1997, the New York State Comptroller issued a report
which noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The Governor presented his 1998-99 Executive Budget to the Legislature
on January 20, 1998. The Executive Budget contains financial projections for
the State's 1997-98 through 2000-01 fiscal years, detailed estimates of receipts
and a proposed Capital Program and Financing Plan for the 1997-98 through 2002-
03 fiscal years. It is expected that the Governor will prepare amendments to
his Executive Budget as permitted under law and that these amendments will be
reflected in a revised Financial Plan. There can be no assurance that the
Legislature will enact into law the Executive Budget as proposed by the
Governor, or that the State's adopted budget projections will not differ
materially and adversely from the projections set forth therein.
The 1998-99 Financial Plan is projected to be balanced on a cash basis
in the General Fund. Total General Fund receipts, including transfers from
other funds, are projected to be $36.22 billion, an increase of $1.02 billion
over projected receipts in the current fiscal year. Total General Fund
disbursements, including transfers to other funds, are projected to be $36.18
billion, an increase of $1.02 billion over the projected expenditures (including
pre-payments), for the current fiscal year. As compared to the 1997-98 State
Financial Plan, the Executive Budget proposes year-to-year growth in General
Fund spending of 2.89 percent. State Funds spending (i.e., General Fund plus
other dedicated funds, with the exception of federal aid) is projected to grow
by 8.5 percent. Spending from All Governmental Funds (excluding transfers) is
proposed to increase by 7.6 percent from the prior fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are
-8-
<PAGE>
projected at $187 million in 1998-99. The Budget also proposes several new tax-
cut initiatives and other funding changes that are projected to further reduce
receipts available to the General Fund by over $200 million. These initiatives
include reducing the fee to register passenger motor vehicles and earmarking a
larger portion of such fees to dedicated funds and other purposes; extending the
number of weeks in which certain clothing purchases are exempt from sales taxes;
more fully conforming State law to reflect recent Federal changes in estate
taxes; continuing lower pari-mutuel tax rates; and accelerating scheduled
property tax relief for farmers from 1999 to 1998. In addition to the specific
tax and fee reductions discussed above, the Executive Budget also proposes
establishing a reserve of $100 million to permit the acceleration into 1998-99
of other tax reductions that are otherwise scheduled in law for implementation
in future fiscal years.
The Division of the Budget estimates that the 1998-99 Financial Plan
includes approximately $62 million in non-recurring resources, comprising less
than two-tenths of one percent of General Fund disbursements. The non-recurring
resources projected for use in 1998-99 consist of $27 million in retroactive
federal welfare reimbursements for family assistance recipients with HIV/AIDS,
$25 million in receipts from the Housing Finance Agency that were originally
anticipated in 1997-98, and $10 million in other measures, including $5 million
in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated at
$4.82 billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and bridge program; $815 million for environmental
activities; $379 million for correctional services; $228 million for the State
University of New York ("SUNY") and the City University of New York ("CUNY");
$290 million for mental hygiene projects; and $375 million for CEFAP.
Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with federal grants financing the remaining 26 percent.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors may be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the financial plan is
based upon forecasts of national and State economic activity. Economic
forecasts have frequently failed to predict accurately the timing and magnitude
of changes in the national and the State economies. Actual results, however,
could differ materially and adversely from the projections set forth in a
financial plan, and those projections may be changed materially and adversely
from time to time.
In the past, the State has taken management actions and has made use
of internal sources to address potential State financial plan shortfalls. The
Division of Budget believes it could take similar actions should variances occur
in its projections for the current fiscal year.
-9-
<PAGE>
Recent Financial Results. The General Fund is the principal operating fund of
- ------------------------
the State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund
and receives almost all State taxes and other resources not dedicated to
particular purposes.
The State ended the first six months of its 1997-98 fiscal year with
an unaudited General Fund cash balance of $3.2 billion, or $254 million above
the August Financial Plan estimate. Total unaudited receipts, including
transfers from other funds, totaled $18.8 billion, or $340 million higher than
expected. The additional receipts reflected higher-than-anticipated tax
revenues of $244 million and miscellaneous receipts of $93 million. Unaudited
General Fund spending for the same period equaled $16.0 billion, or $86 million
above the cashflow projections published in the August Financial Plan. For
fiscal year 1997-98, total General Fund receipts were projected at $35.09
billion, an increase of $2.05 billion from 1996-97 results. Total
disbursements, including transfers to capital projects, debt service and other
funds, were projected at $34.60 billion, or 5.2 percent higher than
disbursements in 1996-97.
The mid-year update projected a closing balance in the General Fund of
$927 million, which was composed of a $530 million reserve for future needs, a
$332 million balance in the Tax Stabilization Reserve Fund ("TSRF") and a $65
million balance in the Contingency Reserve Fund ("CRF").
As part of the 1997-98 Adopted Budget Report, the State also issued
its update to the GAAP-basis Financial Plan for the State's 1997-98 fiscal year,
based on the cash-basis 1997-98 State Financial Plan completed in August. The
GAAP-basis update projected a General Fund operating deficit of $959 million,
primarily reflecting the use of a portion of the 1996-97 cash surplus to fund
1997-98 liabilities, offset by the $530 million reserve for future needs.
Debt Limits and Outstanding Debt. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
----
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues by issuing tax and
revenue anticipation notes and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
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<PAGE>
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") to restructure the way the State makes certain local aid
payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates
that it will transact additional refinancings in 1999, 2000 and 2003 to complete
its long-term plan of finance and further alleviate cash flow imbalances which
are likely to occur in future years. The State does not anticipate that it will
be called upon to make any payments pursuant to the State guarantee in the 1997-
98 fiscal year. JDA recently resumed its lending activities under a revised set
of lending programs and underwriting guidelines.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount to yield net proceeds not in
excess of $4.7 billion (exclusive of certain refunding bonds). Over a period of
years, the issuance of these long-term obligations, which were to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal
borrowing of the State at $4.7 billion, less net proceeds of bonds issued by
LGAC and bonds issued to provide for capitalized interest, except in cases where
the Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing
above the cap was thus permitted in any fiscal year, it was required by law to
be reduced to the cap by the fourth fiscal year after the limit was first
exceeded. As of June 1995, LGAC had issued bonds to provide net proceeds of
$4.7 billion, completing the program.
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<PAGE>
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On
March 2, 1998, S&P affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State
and stated that the outlook for the State's general obligations is stable.
The State anticipates that its capital programs will be financed in
part by State and public authorities borrowings in the 1997-98 fiscal year. The
State expects to issue $605 million in general obligation bonds (including $140
million for purposes of redeeming outstanding bond anticipation notes) and $140
million in general obligation commercial paper. The Legislature has also
authorized the issuance of $311 million in certificates of participation
(including costs of issuance, reserve funds and other costs) during the State's
1997-98 fiscal year for equipment purchases. The projection of State borrowings
for the 1997-98 fiscal year is subject to change as market conditions, interest
rates and other factors vary throughout the fiscal year.
The proposed 1997-98 through 2002-03 Capital Program and Financing
Plan was released with the 1998-99 Executive Budget on January 20, 1998. As a
part of that Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
As a result of these changes, the State's 1997-98 borrowing plan now
reflects: $501 million in general obligation bonds (including $140 million for
purposes of redeeming outstanding bond anticipation notes) and $140 million in
general obligation commercial paper; the issuance of $83 million in COPs for
equipment purchases; and approximately $1.8 billion in borrowings by public
authorities pursuant to lease-purchase and contractual-obligation financings for
capital programs of the State, including costs of issuance, reserve funds, and
other costs, net of anticipated refundings and other adjustments for 1997-98
capital projects. The projection of State borrowings for the 1997-98 fiscal
year is subject to change as market conditions, interest rates and other factors
vary through the end of the fiscal year.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
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<PAGE>
Litigation. Certain litigation pending against New York State or its officers
- ----------
or employees could have a substantial or long-term adverse effect on New York
State finances. Among the more significant of these cases are those that
involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (5) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (6) challenges to
regulations promulgated by the Superintendent of Insurance establishing certain
excess medical malpractice premium rates; (7) challenges to certain aspects of
petroleum business taxes; (8) action alleging damages resulting from the failure
by the State's Department of Environmental Conservation to timely provide
certain data; (9) challenges to the constitutionality of Public Health Law 2807-
d, which imposes a gross receipts tax from certain patient care services; (10)
an action seeking reimbursement from the State for certain costs arising out of
the provision of pre-school services and programs for children with handicapped
conditions; (11) action seeking enforcement of certain sales and excise taxes
and tobacco products and motor fuel sold to non-Indian consumers on Indian
reservations; and (12) a challenge to the constitutionality of Clean Water/Clean
Air Bond Act.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97 and $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision
in the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's 1994-
95 fiscal year. Litigation challenging the constitutionality of the treatment
of certain moneys held in a reserve fund was settled in June 1996 and certain
amounts in a Supplemental Reserve Fund previously credited by the State against
prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could
affect adversely the financial condition of the State in the 1997-98 fiscal year
or thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings may affect the ability of the State to maintain a
balanced
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<PAGE>
financial plan. An adverse decision in any of these proceedings may
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan. In its audited financial statements for
the 1996-97 fiscal year, the State reported its estimated liability for awarded
and anticipated unfavorable judgments to be $364 million, of which $134 million
is expected to be paid during the 1997-98 fiscal year.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in part, to the
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fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets may be impaired,
and the market price of its outstanding debt may be materially and adversely
affected, if any of the Authorities were to default on their respective
obligations, particularly with respect to debt that is State-supported or State-
related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the State of New York
- ----------------------------------
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts currently projected or that State budgets will be adopted by the
April 1 statutory deadline or that any such reductions or delays will not have
adverse effects on the City's cash flow or expenditures. In addition, the
Federal budget negotiation process could result in a reduction in or a delay in
the receipt of Federal grants which could have additional adverse effects on the
City's cash flow or revenues.
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<PAGE>
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell short-
term notes to the public again until 1979. In 1975, S&P suspended its A rating
of City bonds. This suspension remained in effect until March 1981, at which
time the City received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On February 3, 1998, S&P placed a BBB+ rating
on the City's general obligation debt on CreditWatch with positive implications.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded nearly $28 billion of the City's debt from Baa1 to A3.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do
not constitute an enforceable obligation or debt of either the State or the
City. As of June 30, 1997, MAC had outstanding an aggregate of approximately
$4.267 billion of its bonds. MAC is authorized to issue bonds and notes to
refund its outstanding bonds and notes and to fund certain reserves, without
limitation as to principal amount, and to finance certain capital commitments to
the Transit Authority and the New York City School Construction Authority
through the 1997 fiscal year in the event the City fails to provide such
financing.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
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<PAGE>
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and CUNY and
reflected the City's expense and capital budgets for the 1998 fiscal year, which
were adopted on June 6, 1997. The 1998-2001 Financial Plan projected revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP.
The 1998-99 Financial Plan projects General Fund receipts (including transfers
from other funds) of $36.22 billion, an increase of $1.02 billion over the
estimated 1997-98 level. Recurring growth in the State General Fund tax base is
projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates
for 1996-97 or currently estimated for 1997-98, but roughly equivalent to the
rate for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 million to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
1998-99, the General Fund GAAP Financial Plan shows total revenues of $34.68
billion, total expenditures of $35.94 billion, and net other financing sources
and uses of $42 million.
Since the preparation of the 1998-2001 Financial Plan, the State has
adopted its budget for the 1997-1998 fiscal year. The State budget enacted a
smaller sales tax reduction than the tax reduction program assumed by the City
in the financial plan, which will increase projected City sales tax revenues;
provided for State aid to the City which was
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<PAGE>
less than assumed in the financial plan; and enacted a State funded tax relief
program which begins a year later than reflected in the financial plan. In
addition, the net effect of tax law changes made in the Federal Balanced Budget
Act of 1997 is expected to increase tax revenues in the 1998 fiscal year.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1997 fiscal year, there can be no assurance that the gap-closing actions
proposed in the 1998-2001 Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax
increases and reductions in essential City services could adversely affect the
City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based
on various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market; wage increases for City employees
consistent with those assumed in the 1998-2001 Financial Plan; employment
growth; the ability to implement proposed reductions in City personnel and other
cost reduction initiatives; the ability of the Health and Hospitals Corporation
and the BOE to take actions to offset reduced revenues; the ability to complete
revenue generating transactions; provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform; and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was
created as part of the City's effort to assist in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a
declaratory judgment declaring the legislation establishing the Transitional
Finance Authority to be unconstitutional. If such legislation were voided,
projected contracts for the City capital projects would exceed the City's debt
limit during fiscal year 1997-98. Future developments concerning the City or
entities issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
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<PAGE>
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's current financial plan projects
$2.4 billion of seasonal financing for the 1998 fiscal year, the City expects to
undertake only approximately $1.4 billion of seasonal financing. The City
issued $2.4 billion of short-term obligations in fiscal year 1997. Seasonal
financing requirements for the 1996 fiscal year increased to $2.4 billion from
$2.2 billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
1997-98 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken
by the State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share in more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million
gwill be dispersed among all cities, towns and villages, a 3.97% increase in
General Purpose State Aid.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1995, the total indebtedness of all
localities in New York State other than New York City was approximately $19
billion. A small portion (approximately $102.3
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<PAGE>
million) of that indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling New York State legislation. State
law requires the comptroller to review and make recommendations concerning the
budgets of those local government units other than New York City authorized by
State law to issue debt to finance deficits during the period that such deficit
financing is outstanding. Eighteen localities had outstanding indebtedness for
deficit financing at the close of their fiscal year ending in 1995.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantially increased expenditure requirements on affected
localities. If New York State, New York City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within New York State could be adversely affected. Localities also
face anticipated and potential problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Long-range
potential problems of declining urban population, increasing expenditures and
other economic trends could adversely affect localities and require increasing
New York State assistance in the future.
Additional Investment Limitations
- ---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Fund is subject to the following investment limitations, which may be
changed only by a vote of the holders of a majority of the Fund's outstanding
Shares (as defined under "Miscellaneous" in the Prospectus).
The Fund may not:
1. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies, and
limitations;
2. Purchase securities on margin, make short sale of securities, or
maintain a short position; provided that the Fund may enter into futures
contracts and futures options;
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Fund's investment objective, policies, and limitations may be deemed to
be underwriting;
4. Purchase or sell real estate, except that the Fund may invest in
Municipal Obligations secured by real estate or interests therein;
5. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Fund may
enter into futures contracts and futures options;
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<PAGE>
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, Inc., 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 financial institutions ("Shareholder Organizations"). Shares
are also offered for sale directly to institutional investors and members of the
general public. Different types of Customer accounts at the Shareholder
Organizations may be used to purchase Shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically
"sweep" a Customer's account not less frequently than weekly and invest amounts
in excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in Shares selected by the Customer. Investors purchasing Shares may
include officers, directors, or employees of the particular Shareholder
Organization.
Excelsior Tax-Exempt Fund has authorized certain brokers to accept on
its behalf purchase, exchange and redemption orders. Such brokers are
authorized to designate other intermediaries to accept purchase, exchange and
redemption orders on behalf of Excelsior Tax-Exempt Fund. Excelsior Tax-Exempt
Fund will be deemed to have received a purchase, exchange or redemption order
when such an authorized broker or designated intermediary accepts the order.
Shares of the Fund are offered for sale at their net asset value per
Share next computed after a purchase order is received in good order by
Excelsior Tax-Exempt Fund's sub-transfer agent or after a purchase order is
accepted by an authorized broker or designated intermediary. Similarly, an
order for the exchange or redemption of Shares will receive the net asset value
per Share next computed after the order is received in good order by Excelsior
Tax-Exempt Fund's sub-transfer agent or after the order is accepted by an
authorized broker or designated intermediary.
Prior to February 14, 1997, Shares of the Fund were offered for sale
with a maximum sales charge of 4.50%. No sales charges were imposed in
connection with sales of Shares of the Fund during the fiscal years ended March
31, 1997 and 1996.
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<PAGE>
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 (the "SEC"); (b) the Exchange is closed for other than customary
weekend and holiday closings; (c) the SEC has by order permitted such
suspension; or (d) an emergency exists as determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market 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 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 certain circumstances, Excelsior Tax-Exempt Fund may, in its
discretion, accept securities as payment for Shares. Securities acquired in
this manner will be limited to securities issued in transactions involving a
bona fide reorganization or statutory merger, or to other transactions involving
- ---------
securities that meet the investment objective and policies of the Fund.
-21-
<PAGE>
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the investor
must deposit any outstanding certificates for Shares with Chase Global Funds
Services Company, the Fund's sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of the Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund 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. Customers of Shareholder Organizations may obtain
information on the availability of, and the procedures and fees relating to, the
Systematic Withdrawal Plan directly from their Shareholder Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of any other portfolio of
Excelsior Tax-Exempt Fund or Excelsior Funds, Inc. ("Excelsior Fund" and,
collectively with Excelsior Tax-Exempt Fund, the "Companies") or for Trust
Shares of Excelsior Institutional Trust. Shares may be exchanged by wire,
telephone or mail and must be made to accounts of identical registration. There
is no exchange fee imposed by the Companies or Excelsior Institutional Trust.
In order to prevent abuse of this privilege to the disadvantage of other
shareholders, the Companies and Excelsior Institutional Trust reserve the right
to limit the number of exchange requests of Investors and Customers of
Shareholder Organizations to no more than six per year. The Companies and
Excelsior Institutional Trust may modify or terminate the exchange program at
any time upon 60 days' written notice to shareholders, and may reject any
exchange request. Customers of
-22-
<PAGE>
Shareholder Organizations may obtain information on the availability of, and the
procedures and fees relating to, such program directly from their Shareholder
Organizations.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged Shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Other Investor Programs
- -----------------------
As described in the Prospectus, Shares of the Fund may be purchased in
connection with the Automatic Investment Program. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
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.
Prior to December 28, 1995, Excelsior Tax-Exempt Fund was known as "UST Master
Tax-Exempt Funds, Inc."
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.
-23-
<PAGE>
Shareholders of Excelsior Tax-Exempt Fund are entitled to one vote for
each full share held, and fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except as otherwise required by the 1940
Act or other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the outstanding shares of Excelsior Tax-Exempt Fund may elect all of Excelsior
Tax-Exempt Fund's directors, regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as Excelsior Tax-Exempt Fund shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical or that the matter does not affect any
interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent public
accountants 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.
-24-
<PAGE>
MANAGEMENT OF THE FUND
----------------------
Directors and Officers
- ----------------------
The directors and executive officers of Excelsior Tax-Exempt Fund,
their addresses, ages, principal occupations during the past five years, and
other affiliations are as follows:
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Director of Excelsior Fund
238 June Road President & Treasurer and Excelsior Tax-Exempt Fund (since
Stamford, CT 06903 1995); Trustee of Excelsior Funds and
Age: 67 Excelsior Institutional Trust (since
1995); Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York
(from February 1990 until September
1995); and Chairman, U.S. Trust
Connecticut (from March 1993 to May
1997).
Donald L. Campbell Director Retired; Director of Excelsior Fund
333 East 69th Street and Excelsior Tax-Exempt Fund (since
Apt. 10-H 1984); Director of UST Master
New York, NY 10021 Variable Series, Inc. (from 1994 to
Age: 72 June 1997); Trustee of Excelsior
Institutional Trust (since 1995); and
Director, Royal Life Insurance Co. of
New York (since 1991).
</TABLE>
- ------------------------
/1/ This director is considered to be an "interested person" of Excelsior
Tax-Exempt Fund as defined in the 1940 Act.
-25-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Rodman L. Drake Director Director, Excelsior Fund and
Continuation Investments Group, Inc. Excelsior Tax-Exempt Fund (since
1251 Avenue of the Americas, 9/(th)/ Floor 1996); Trustee, Excelsior
New York, NY 10020 Institutional Trust and Excelsior
Age: 55 Funds (since 1994); Director, Parsons
Brinkerhoff Energy Services Inc.
(since 1996); Director, Parsons
Brinkerhoff, Inc. (engineering firm)
(since 1995); President,
Continuation Investments Group, Inc.
(since 1997); President, Mandrake
Group (investment and consulting
firm) (1994-1997); Director, Hyperion
Total Return Fund, Inc. and four
other funds for which Hyperion
Capital Management, Inc. serves as
investment adviser (since 1991);
Co-Chairman, KMR Power Corporation
(power plants) (from 1993 to 1996);
Director, The Latin America Smaller
Companies Fund, Inc. (since 1993);
Member of Advisory Board, Argentina
Private Equity Fund L.P. (from 1992
to 1996) and Garantia L.P. (Brazil)
(from 1993 to 1996); and Director,
Mueller Industries, Inc. (from 1992
to 1994).
Joseph H. Dugan Director Retired; Director of Excelsior Fund
913 Franklin Lake Road and Excelsior Tax-Exempt Fund (since
Franklin Lakes, NJ 07417 1984); Director of UST Master
Age: 73 Variable Series, Inc. (from 1994 to
June 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior Fund
2320 Cumberland Road and Excelsior Tax-Exempt Fund (since
Charlottesville, VA 1986); Director of UST Master
22901 Variable Series, Inc. (from 1994 to
Age: 77 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
W. Wallace McDowell, Jr. Director Director, Excelsior Fund and
c/o Prospect Capital Excelsior Tax-Exempt Fund (since
Corp. 1996); Trustee, Excelsior
43 Arch Street Institutional Trust and Excelsior
Greenwich, CT 06830 Funds (since 1994); Private Investor
Age: 61 (since 1994); Managing Director,
Morgan Lewis Githens & Ahn (from 1991
to 1994); and Director, U.S. Homecare
Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children's
Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and
Jack Morton Productions (since 1987).
Jonathan Piel Director Director, Excelsior Fund and
558 E. 87th Street Excelsior Tax-Exempt Fund (since
New York, New York 10128 1996); Trustee, Excelsior
Age: 59 Institutional Trust and Excelsior
Funds (since 1994); Vice President
and Editor, Scientific American, Inc.
(from 1986 to 1994); Director, Group
for The South Fork, Bridgehampton,
New York (since 1993); and Member,
Advisory Committee, Knight Journalism
Fellowships, Massachusetts Institute
of Technology (since 1984).
Robert A. Robinson Director Director of Excelsior Fund and
Church Pension Fund Excelsior Tax-Exempt Fund (since
800 Second Avenue 1987); Director of UST Master
New York, NY 10017 Variable Series, Inc. (from 1994 to
Age: 72 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
President Emeritus, The Church
Pension Fund and its affiliated
companies (since 1966); Trustee, H.B.
and F.H. Bugher Foundation and
Director of its wholly-owned
subsidiaries--Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1995);
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since
1995).
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Alfred C. Tannachion/2/ Director Retired; Director of Excelsior Fund
6549 Pine Meadows Drive and Excelsior Tax-Exempt Fund (since
Spring Hill, FL 34606 1985); Chairman of the Board of
Age: 72 Excelsior Fund and Excelsior
Tax-Exempt Fund (1991-1997) and
Excelsior Institutional Trust
(1996-1997); President and Treasurer
of Excelsior Fund and Excelsior
Tax-Exempt Fund (1994-1997) and
Excelsior Institutional Trust
(1996-1997); Chairman of the Board,
President and Treasurer of UST Master
Variable Series, Inc. (1994-1997);
and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
Philadelphia National Bank Building Biddle & Reath LLP.
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 55
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker
Philadelphia National Bank Building Biddle & Reath LLP.
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 39
Edward Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Global Funds Services Company
Services Company (November 1996 to present); and
73 Tremont Street Officer and Manager of Financial
Boston, MA 02108-3913 Reporting, Investors Bank & Trust
Age: 37 Company (January 1991 to November
1996).
</TABLE>
- --------------------
/2/ This director is considered to be an "interested person" of Excelsior
Tax-Exempt Fund as defined in the 1940 Act.
-28-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
John M. Corcoran Assistant Treasurer Vice President, Director of Fund
Chase Global Funds Administration, Chase Global Funds
Services Company Services Company (since April 1998);
73 Tremont Street Vice President, Senior Manager of
Boston, MA 02108-3913 Fund Administration, Chase Global
Age: 33 Funds Services Company (from July
1996 to April 1998); Second Vice
President, Manager of Fund
Administration, Chase Global Funds
Services Company (from October 1993
to July 1996); and Audit Manager,
Ernst & Young LLP (from August 1987
to September 1993).
</TABLE>
Each director of Excelsior Tax-Exempt Fund receives an annual fee of
$9,000 plus a meeting fee of $1,500 for each meeting attended and is reimbursed
for expenses incurred in attending meetings. The Chairman of the Board is
entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to Excelsior Tax-Exempt Fund. The
employees of Chase Global Funds Services Company do not receive any compensation
from Excelsior Tax-Exempt Fund for acting as officers of Excelsior Tax-Exempt
Fund. No person who is currently an officer, director or employee of the
Investment Adviser serves as an officer, director or employee of Excelsior Tax-
Exempt Fund. As of July 8, 1998, the directors and officers of Excelsior Tax-
Exempt Fund as a group owned beneficially less than 1% of the outstanding Shares
of Excelsior Tax-Exempt Fund, and less than 1% of the outstanding shares of all
funds of Excelsior Tax-Exempt Fund in the aggregate.
The following chart provides certain information about the fees
received by Excelsior Tax-Exempt Fund's directors in the most recently completed
fiscal year.
-29-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation from
Aggregate Accrued as Excelsior Tax-Exempt
Compensation from Part of Fund and Fund
Name of Excelsior Fund Complex* Paid
Person/Position Tax-Exempt Fund Expenses to Directors
- --------------- --------------- ---------- --------------------
<S> <C> <C> <C>
Donald L. Campbell $15,000 None $38,000(3)**
Director
Rodman L. Drake $13,500 None $39,500(4)**
Director
Joseph H. Dugan $15,000 None $38,000(3)**
Director
Wolfe J. Frankl $15,000 None $36,500(3)**
Director
W. Wallace McDowell,
Jr. $13,500 None $38,000(4)**
Director
Jonathan Piel $15,000 None $43,000(4)**
Director
Robert A. Robinson $15,000 None $38,000(3)**
Director
Alfred C. Tannachion $15,000 None $38,000(3)**
Director
Frederick S. Wonham $20,000 None $53,000(4)**
Chairman of the Board,
President and Treasurer
</TABLE>
- -----------------------
* The "Fund Complex" consists of Excelsior Fund, Excelsior Tax-Exempt Fund,
Excelsior Funds and Excelsior Institutional Trust.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
Investment Advisory and Administration Agreements
- -------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively
with U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as
Investment Adviser to the Fund. In the Investment Advisory Agreement, the
Investment Adviser has agreed to provide the services described in the
Prospectus. The Investment Adviser has also agreed to pay all expenses
-30-
<PAGE>
incurred by it in connection with its activities under the agreement other than
the cost of securities, including brokerage commissions, if any, purchased for
the Fund.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Fund pursuant to an advisory agreement substantially similar to
the Investment Advisory Agreement currently in effect for the Fund.
For the fiscal year ended March 31, 1998, Excelsior Tax-Exempt Fund
paid U.S. Trust advisory fees of $549,765 with respect to the Fund. For the
same period, U.S. Trust waived advisory fees totaling $33,485 with respect to
the Fund.
For the fiscal years ended March 31, 1997 and 1996, Excelsior Tax-
Exempt Fund paid U.S. Trust New York advisory fees of $451,669 and $450,208,
respectively, with respect to the Fund. For the same periods, U.S. Trust New
York waived advisory fees totaling $30,358 and $22,385, respectively, with
respect to the Fund.
The Investment Advisory Agreement provides that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of this agreement,
except that the Investment Adviser shall be jointly, but not severally, liable
for a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder. In addition, the Investment Adviser has undertaken
in the Investment Advisory Agreement to maintain its policy and practice of
conducting its Asset Management Group independently of its Banking Group.
Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services, an affiliate of the Distributor, and U.S. Trust
Connecticut (the "Administrators") 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, if any, of the Fund.
The Administrators prepare semiannual reports to the SEC, prepare Federal and
state tax returns, prepare filings with state securities commissions, arrange
for and bear the cost of processing Share purchase and redemption orders,
maintain the Fund's financial accounts and records, and generally assist in all
aspects of the Fund's operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Fund's administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Fund. Prior to August 1, 1995, administrative
services were provided to the Fund by CGFSC and Concord Holding Corporation
(collectively, the "former administrators") under an administration agreement
having substantially the same terms as the Administration Agreement currently in
effect.
-31-
<PAGE>
For the fiscal year ended March 31, 1998, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services, and U.S. Trust $178,440 in the
aggregate with respect to the Fund. For the same period, CGFSC, Federated
Administrative Services and U.S. Trust waived administration fees totaling $34
with respect to the Fund.
For the fiscal year ended March 31, 1997, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust New York $148,160
in the aggregate with respect to the Fund. For the same period, CGFSC,
Federated Administrative Services and U.S. Trust New York waived administration
fees totaling $50 with respect to the Fund.
For the period August 1, 1995 through March 31, 1996, Excelsior Tax-
Exempt Fund paid CGFSC, Federated Administrative Services and U.S. Trust New
York $98,971 in the aggregate with respect to the Fund. For the same period,
CGFSC, Federated Administrative Services and U.S. Trust New York waived
administration fees totaling $41 with respect to the Fund.
For the period April 1, 1995 through July 31, 1995, Excelsior Tax-
Exempt Fund paid the former administrators $46,815 in the aggregate with respect
to the Fund. For the same period, the former administrators waived
administration fees totaling $160 with respect to the Fund.
Shareholder Organizations
- -------------------------
As stated in the Prospectus, Excelsior Tax-Exempt Fund has entered
into agreements with certain Shareholder Organizations. Such agreements require
the Shareholder Organizations to provide shareholder administrative services to
their Customers who beneficially own Shares in consideration for the Fund's
payment of not more than the annual rate of 0.40% of the average daily net
assets of the Fund's Shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recorder of Shares; (b)
assisting in processing purchase, exchange and redemption transactions; (c)
providing periodic statements showing a Customer's account balances and
confirmations of transactions by the Customer; (d) providing tax and dividend
information to shareholders as appropriate; (e) transmitting proxy statements,
annual reports, updated prospectuses and other communications from Excelsior
Tax-Exempt Fund to Customers; and (f) providing or arranging for the provision
of other related services.
Excelsior Tax-Exempt Fund's agreements with Shareholder 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 Shareholder
Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of Excelsior Tax-Exempt Fund's directors, including a
majority of the directors
-32-
<PAGE>
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 Shareholder 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 Shareholder Organizations are in
effect, the selection and nomination of the members of Excelsior Tax-Exempt
Fund's Board of Directors who are not "interested persons" (as defined in the
1940 Act) of Excelsior Tax-Exempt Fund will be committed to the discretion of
such Disinterested Directors.
For the fiscal years ended March 31, 1998, 1997 and 1996, payments to
Shareholder Organizations totaled $33,519, $30,408 and $22,586, respectively,
with respect to the Fund, of which $33,418, $30,408 and $22,586, respectively,
was paid to affiliates of U.S. Trust.
Expenses
- --------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Fund bears the expenses incurred in its operations. Such
expenses include: taxes; interest; fees (including 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.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase") serves as custodian of the Fund's
assets. Under the Custodian Agreement, Chase has agreed to: (i) maintain a
separate account or accounts in the name of the Fund; (ii) make receipts and
disbursements of money on behalf of the Fund; (iii) collect and receive all
income and other payments and distributions on account of the Fund's portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to Excelsior Tax-Exempt Fund's Board of Directors
concerning the Fund's operations. Chase may, at its own expense, open and
maintain custody accounts with respect to the Fund with other banks or trust
companies, provided that Chase shall remain liable for the performance of all
its custodial duties under the Custodian Agreement, notwithstanding any
delegation.
-33-
<PAGE>
U.S. Trust New York also serves as the Fund's transfer agent and
dividend disbursing agent. In such capacity, U.S. Trust New York has agreed to:
(i) issue and redeem Shares; (ii) address and mail all communications by the
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's Board of Directors concerning the Fund's operations.
For its transfer agency, dividend disbursing, and subaccounting services, U.S.
Trust New York is entitled to receive $15.00 per annum per account and
subaccount. In addition, U.S. Trust New York is entitled to be reimbursed for
its out-of-pocket expenses for the cost of forms, postage, processing purchase
and redemption orders, handling of proxies, and other similar expenses in
connection with the above services.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. For the services
provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum
per account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from Excelsior Tax-Exempt Fund for any of its sub-transfer agency
services. U.S. Trust New York may, from time to time, enter into sub-transfer
agency arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of Excelsior Tax-Exempt Fund's Board of
Directors, the Investment Adviser is responsible for, makes decisions with
respect to, and places orders for all purchases and sales of portfolio
securities.
The Fund may engage in short-term trading to achieve its investment
objective. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Fund's turnover rate may be
higher than that of many other investment companies with similar investment
objectives and policies. The Fund's portfolio turnover rate may also be
affected by cash requirements for redemptions of Shares and by regulatory
provisions which enable the Fund to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Prospectus for the Fund's portfolio turnover
rate.
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
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<PAGE>
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down. With respect to over-the-counter transactions, the Fund, where
possible, will deal directly with dealers who make a market in the securities
involved, except in those situations where better prices and execution are
available elsewhere.
The Investment Advisory Agreement provides that, in executing
portfolio transactions and selecting brokers or dealers, the Investment Adviser
will seek to obtain the best net price and the most favorable execution. The
Investment Adviser shall consider factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer and whether such
broker or dealer is selling shares of Excelsior Tax-Exempt Fund, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In addition, the Investment Advisory Agreement authorizes the
Investment Adviser, to the extent permitted by law and subject to the review of
Excelsior Tax-Exempt Fund's Board of Directors from time to time with respect to
the extent and continuation of the policy, to cause the Fund to pay a broker
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker for effecting the same transaction,
provided that the Investment Adviser determines in good faith that such
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the overall responsibilities of the Investment Adviser to the
accounts as to which it exercises investment discretion. Such brokerage and
research services might consist of reports and statistics on specific companies
or industries, general summaries of groups of stocks and their comparative
earnings, or broad overviews of the fixed-income market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fee payable by the Fund. Such
information may be useful to the Investment Adviser in serving the Fund and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Fund.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, Distributor, or any affiliated person of either of them (as
such term is defined in the 1940 Act) acting as principal, except to the extent
permitted by the SEC.
Investment decisions for the Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Investment Adviser believes to be equitable to the Fund and
such other investment company or common trust fund. In some instances, this
investment procedure may adversely affect the price
-35-
<PAGE>
paid or received by the Fund or the size of the position obtained by the Fund.
To the extent permitted by law, the Investment Adviser may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.
Excelsior Tax-Exempt Fund is required to identify any securities of
its regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
its parents held by the Fund as of the close of the most recent fiscal year. As
of March 31, 1998, the Fund did not hold any securities of Excelsior Tax-Exempt
Fund's regular brokers or dealers or their parents.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Excelsior Tax-Exempt Fund. The Fund's Financial
Highlights included in the Prospectus and the financial statements for the
fiscal year ended March 31, 1998 incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
included in their report thereon which appears therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
Excelsior Tax-Exempt Fund, and Mr. Malloy, Assistant Secretary of Excelsior Tax-
Exempt Fund, are partners), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, 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.
-36-
<PAGE>
As stated in the Prospectus, the Fund is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Fund will not be suitable for tax-exempt institutions
and may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and individual retirement accounts because such plans and
accounts are generally tax-exempt and, therefore, not only would not gain any
additional benefit from the Fund's dividends being tax-exempt, but such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. In addition, the Fund may not be an appropriate investment for entities
which are "substantial users" of facilities financed by private activity bonds
or "related persons" thereof. "Substantial user" is defined under the Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, who occupies more
than 5% of the usable area of such facilities or for whom such facilities or a
part thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.
In order for the Fund to pay exempt-interest dividends for any taxable
year, at least 50% of the aggregate value of the Fund's portfolio must consist
of exempt-interest obligations at the close of each quarter of its taxable year.
Within 60 days after the close of the taxable year, the Fund will notify its
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by the Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code received
by the Fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as exempt-
interest dividends 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 Fund's Shares generally is not deductible for Federal 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
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<PAGE>
written notice mailed by the Fund to shareholders not later than 60 days after
the close of the Fund's taxable year.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or 31% of gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure properly to include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so either that they are not subject to backup
withholding or that they are "exempt recipients."
* * *
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
The Fund may advertise the standardized effective 30-day (or one
month) yields calculated in accordance with the method prescribed by the SEC for
mutual funds. Such yield will be calculated separately for the Fund according
to the following formula:
a-b
Yield = 2 [(----- + 1)/(6)/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = average daily number of Shares outstanding that were
entitled to receive dividends.
d = maximum offering price per Share on the last day of the
period.
-38-
<PAGE>
For the purpose of determining interest earned during the period
(variable "a" in the formula), the Fund computes the yield to maturity of any
debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. The
Fund calculates interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Fund to all shareholder accounts and to the
particular series of Shares in proportion to the length of the base period and
the Fund's mean (or median) account size. Undeclared earned income will be
subtracted from the maximum offering price per Share (variable "d" in the
formula).
Based on the foregoing calculations, the Fund's standardized effective
yield for the 30-day period ended March 31, 1998 was 3.45%.
The "tax-equivalent" yield of the Fund is computed by: (a) dividing
the portion of the yield (calculated as above) that is exempt from Federal
income tax by one minus a stated Federal income tax rate and (b) adding that
figure to that portion, if any, of the yield that is not exempt from Federal
income tax. Tax-equivalent yields assume the payment of Federal income taxes at
a rate of 31%.
Based on the foregoing calculation, the tax-equivalent yield of the
Fund for the 30-day period ended March 31, 1998 was 5.00%.
The Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV /1/n/
T = [(-----) - 1]
P
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<PAGE>
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year (or
other) periods at the end of the applicable period (or a
fractional portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
The calculation is made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
Share existing on the reinvestment date, (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. The average annual total returns for the Fund's Shares for
the one year period ended March 31, 1998, the five year period ended March 31,
1998 and for the period from commencement of operations (May 31, 1990) to March
31, 1998 were 8.35%, 5.47% and 6.58%, respectively.
The Fund may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately the Fund's performance with other measures of investment return. For
example, in comparing the Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, the Fund may
calculate its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in Shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value.
The total return and yield of the Fund may be compared to that of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the total return and/or yield of the Fund may be compared to data
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
and Weisenberger Investment Company Service. Total return and yield data as
reported in national financial publications such as Money Magazine, Forbes,
----- -------- ------
Barron's, The Wall Street Journal and The New York Times, or in publications of
- -------- --- ---- ------ ------- --- --- ---- -----
a local or regional nature, may also be used in comparing the performance of the
Fund. Advertisements, sales literature or reports to shareholders may from time
to time also include a discussion and analysis of the Fund's performance,
including without limitation, those factors, strategies and technologies that
together with market conditions and events, materially affected the Fund's
performance.
-40-
<PAGE>
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, advertisements, 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 communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to the Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of Excelsior Tax-Exempt Fund not belonging to a particular portfolio of
Excelsior Tax-Exempt Fund. In determining the net asset value of the Fund's
Shares, assets belonging to the Fund allocable to Shares are charged with the
direct liabilities of the Fund allocable to Shares and with a share of the
general liabilities of Excelsior Tax-Exempt Fund which are normally allocated in
proportion to the relative asset values of Excelsior Tax-Exempt Fund's
portfolios at the time of allocation. Subject to the provisions of Excelsior
Tax-Exempt Fund's Charter, determinations by the Board of Directors as to the
direct and allocable liabilities, and the allocable portion of any general
assets with respect to the Fund, are conclusive.
As of July 8, 1998, U.S. Trust and its affiliates held of record
substantially all of Excelsior Tax-Exempt Fund's outstanding shares as agent or
custodian for their customers, but did not own such shares beneficially because
they did not have voting or investment discretion with respect to such shares.
-41-
<PAGE>
As of July 8, 1998, no person beneficially owned 5% or more of the
outstanding Shares of the Fund.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in Excelsior Tax-
Exempt Fund's Annual Report to Shareholders for the fiscal year ended March 31,
1998 (the "1998 Annual Report") for the Fund are incorporated in this Statement
of Additional Information by reference. No other parts of the 1998 Annual
Report are incorporated by reference herein. The financial statements included
in the 1998 Annual Report for the Fund have been audited by Excelsior Tax-Exempt
Fund's independent auditors, Ernst & Young LLP, whose reports thereon also
appear in the 1998 Annual Report and are incorporated herein by reference. Such
financial statements have been incorporated herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 1998 Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
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<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment
on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be
A-1
<PAGE>
evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1."
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
payment of principal and interest of debt instruments with original maturities
of one year or less. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of
A-3
<PAGE>
principal and interest is strong, the relative degree of safety is not as high
as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or
A-4
<PAGE>
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation 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 or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - 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
A-5
<PAGE>
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in 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.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
A-6
<PAGE>
"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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
A-7
<PAGE>
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these 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.
A-8
<PAGE>
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC" and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-9
<PAGE>
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
California Tax-Exempt Income Fund
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
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") of Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt
Fund") dated August 1, 1998 (the "Prospectus"). Much of the information
contained in this Statement of Additional Information expands upon the subjects
discussed in the Prospectus. No investment in shares of the Fund ("Shares")
should be made without reading the Prospectus. A copy of the Prospectus may be
obtained by writing Excelsior Tax-Exempt Fund c/o Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
Page
----
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES......................................... 1
Additional Information on Portfolio Instruments...................... 1
Special Considerations Relating to California Municipal Obligations.. 6
Additional Investment Limitations.................................... 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 21
INVESTOR PROGRAMS......................................................... 22
Systematic Withdrawal Plan........................................... 22
Exchange Privilege................................................... 23
Other Investor Programs.............................................. 23
DESCRIPTION OF CAPITAL STOCK.............................................. 23
MANAGEMENT OF THE FUND.................................................... 25
Directors and Officers............................................... 25
Investment Advisory, Sub-Advisory and Administration Agreements...... 32
Shareholder Organizations............................................ 33
Expenses............................................................. 34
Custodian and Transfer Agent......................................... 34
PORTFOLIO TRANSACTIONS.................................................... 35
INDEPENDENT AUDITORS...................................................... 37
COUNSEL................................................................... 37
ADDITIONAL INFORMATION CONCERNING TAXES................................... 37
Federal.............................................................. 37
California........................................................... 39
PERFORMANCE AND YIELD INFORMATION......................................... 41
MISCELLANEOUS............................................................. 44
FINANCIAL STATEMENTS...................................................... 44
APPENDIX A................................................................ A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The investment objective and policies of the Fund are described in the
Prospectus. The following information supplements the description of the
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 regular Federal income tax and not treated as a specific
tax preference item under the Federal alternative minimum tax.
The two principal classifications of Municipal Obligations are
"general obligation" and "revenue" issues, but the Fund's portfolio may also
include "moral obligation" issues. 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 nationally recognized statistical rating
organizations ("NRSROs") such as Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Services ("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 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 ("U.S. Trust New York"), U.S. Trust Company of Connecticut ("U.S.
Trust Connecticut" and, collectively with U.S. Trust New York, the "Investment
Adviser" or "U.S. Trust") and U.S. Trust Company, N.A., 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. An issuer's
obligations
<PAGE>
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.
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, Investment
Adviser and Sub-Adviser will not review the proceedings relating to the issuance
of Municipal Obligations or the bases for such opinions.
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.
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
-2-
<PAGE>
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-3" or higher by S&P or "Prime-3" 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.
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, as
amended (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.
-3-
<PAGE>
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held by it. Under a "stand-by commitment," a dealer or bank agrees
to purchase from the Fund, at the Fund's option, specified Municipal Obligations
at a specified price. The amount payable to the Fund upon its exercise of a
"stand-by commitment" is normally (i) the Fund's acquisition cost of the
Municipal Obligations (excluding any accrued interest which the Fund paid on
their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. "Stand-by commitments" are
exercisable by the Fund at any time before the maturity of the underlying
Municipal Obligations, and may be sold, transferred or assigned by the Fund only
with the underlying instruments.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for securities which are acquired
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities). Where the Fund has paid any consideration
directly or indirectly for a "stand-by commitment," its cost will be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
The Fund intends to enter into "stand-by commitments" only with banks
and broker/dealers which, in the Investment Adviser's 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. 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
-4-
<PAGE>
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 have 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.
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,
-5-
<PAGE>
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.
Special Considerations 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 Statement of Additional Information from official statements
and prospectuses relating to securities offerings of the State of California and
various local agencies in California.
Economic Factors
- ----------------
Fiscal Years Prior to 1995-96
Pressures on the State's budget in the late 1980's and early 1990's
were caused by a combination of external economic conditions and growth of the
largest General Fund Programs -- K-14 education, health, welfare and corrections
- -- at rates faster than the revenue base. These pressures could continue as the
State's overall population and school age population continue to grow, and as
the State's corrections program responds to a "Three Strikes" law enacted in
1994, which requires mandatory life prison terms for certain third-time felony
offenders. In addition, the State's health and welfare programs are in a
transition period as a result of recent Federal and state welfare reform
initiatives.
As a result of these factors and others, and especially because a
severe recession between 1990-94 reduced revenues and increased expenditures for
social welfare programs, from the late 1980's until 1992-93, the State had
periods of significant budget imbalance. During this period, expenditures
exceeded revenues in four out of six years, and the State accumulated and
sustained a budget deficit in its budget reserve -- the Special Fund for the
Economic Uncertainties ("SFEU") -- approaching $2.8 billion at its peak on June
30, 1993. Between the 1991-92 and 1994-95 Fiscal Years, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance, including: significant cuts in health and welfare program
expenditures; transfers of program responsibilities and funding from the State
to local governments; transfers of about $3.6 billion in annual local property
tax revenues from other local governments to local school
-6-
<PAGE>
districts, thereby reducing State funding for schools under Proposition 98; and
revenue increases (particularly in the 1991-92 Fiscal Year budget), most of
which were for a short duration.
Despite these budget actions, as noted above, the effects of the
recession led to large, unanticipated deficits in the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire such deficit in
one year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over to the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
Fiscal Year.
Another consequence of the accumulated budget deficit, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of notes
and revenue anticipation warrants were issued in the period from June 1992 to
July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted above. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July 1994 and matured on April 25, 1996.
1995-96 and 1996-97 Fiscal Years
With the end of the recession, and a growing economy beginning in
1994, the State's financial condition improved markedly in the last two fiscal
years, with a combination of better than expected revenues, slowdown in growth
of social welfare programs, and continued spending restraint based on the
actions taken in earlier years. The last of the recession-induced budget
deficits was repaid, allowing the SFEU to post a positive cash balance for only
the second time in the 1990's, totaling $281 million as of June 30, 1997. The
State's cash position also returned to health, as cash flow borrowing was
limited to $3 billion in 1996-97, and no deficit borrowing has occurred over the
end of these last two fiscal years.
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In each of these two fiscal years, the State budget contained the
following major features:
1. Expenditures for K-14 schools grew significantly, as new revenues
were directed to school spending under Proposition 98. This new money allowed
several new education initiatives to be funded, and raised K-12 per-pupil
spending to around $4,900 by Fiscal Year 1996-97. See "Constitutional,
Legislative and Other Factors-- Proposition 98" below.
2. The budgets restrained health and welfare spending levels, holding
to the reduced benefit levels enacted in earlier years, and attempted to reduce
General Fund spending by calling for greater support from the Federal
government. The State also attempted to shift to the Federal government a larger
share of the cost of incarceration and social services for illegal aliens. Some
of these efforts were successful, and Federal welfare reform also helped, but as
a whole the Federal support never reached the levels anticipated when the
budgets were enacted. These funding shortfalls were, however, filled by the
strong revenue collections, which exceeded expectations.
3. General Fund support for the University of California and the
California State University system grew by an average of 5.2% and 3.3% per year,
respectively, and there were no increases in student fees.
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons were approved for
construction, however.
5. There were no tax increases, and starting January 1, 1997, there
was a 5.0% cut in corporate taxes. The suspension of the Renter's Tax Credit,
first taken as a cost-saving measure during the recession, was continued.
As noted, the economy grew strongly during these fiscal years, and as
a result, the General Fund took in substantially greater tax revenues (about
$2.2 billion in 1995-96 and $1.6 billion in 1996-97) than were initially planned
when the budgets were enacted. These additional funds were largely directed to
school spending as mandated by Proposition 98, and to make up shortfalls from
reduced Federal health and welfare aid. As a result, there was no dramatic
increase in budget reserves, although the accumulated budget deficit from the
recession years was finally eliminated in the past fiscal year.
1997-98 Fiscal Year
Background
----------
On January 9, 1997, the Governor released his proposed budget for the
1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated
General Fund revenues and transfers of about $50.7 billion, and proposed
expenditures of $50.3 billion,
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resulting in an anticipated budget reserve in the SFEU of about $550 million.
The Proposed Budget included provisions for a further 10% cut in Bank and
Corporation Taxes, which ultimately was not enacted by the Legislature.
At the time of the Department of Finance May Revision, released on May
14, 1997, the Department of Finance increased its revenue estimate for the
upcoming fiscal year by $1.3 billion, in response to the continued strong growth
in the State's economy. Budget negotiations continued into the summer, with
major issues to be resolved including final agreement on State welfare reform,
an increase in State employee salaries and consideration of the tax cut proposed
by the Governor.
In May 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v Wilson, which made final a judgment against the State
-------------
requiring an immediate payment from the General Fund to the Public Employees
Retirement Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.235 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
In late 1997, the plaintiffs filed a claim with the State Board of Control for
payment of interest under the Court rulings in an amount of $308 million. The
Department of Finance has recommended approval of this claim. If approved by
the Board of Control, the claim would become part of an annual claims bill in
the 1998-99 Budget.
Fiscal Year 1997-98 Budget Act
Following the transfer of funds to the PERF, final agreement was
reached within a few weeks on the welfare package and the remainder of the
budget. The Legislature passed the Budget Bill on August 11 1997, along with
numerous related bills to implement its provisions. Agreement was not finally
reached at that time on one aspect of the budget plan, concerning the Governor's
proposal for a comprehensive educational testing program.
On August 18, 1997, the Governor signed the Budget Act, but vetoed
about $314 million of specific spending items, primarily in health and welfare
and education areas from both the General Fund and Special Funds. Approximately
$200 million of this amount was restored in subsequent legislation passed before
the end of the Legislative Session.
The Budget Act anticipated General Fund revenues and transfers of
$52.5 billion (a 6.8% increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0% increase from the 1996-97 levels). The Budget Act
also included Special Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14.0 billion), and $2.1 billion of expenditures from
various Bond Funds. Subsequent to the Budget Act
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enactment, the State undertook its normal cash flow borrowing program by issuing
$3.0 billion of Notes which mature June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase
in funding for K-14 education under Proposition 98, reflecting strong revenues
which have exceeded initial budgeted amounts. Part of the nearly $1.75 billion
in increased spending was allocated to prior fiscal years. Funds were provided
to fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives. (See "Constitutional,
Legislative and Other Factors -- Proposition 98" below.)
2. The Budget Act reflected the $1.228 billion pension case judgment
payment, and brought funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
3. Continuing the third year of a four-year "compact" which the
Administration had made with higher education units, funding from the General
Fund for the University of California and the California State University system
was increased by approximately 6.0% ($121 million and $107 million,
respectively). There was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the new
CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain
Federal budget actions. About $300 million in general funds, already included in
the Federal Fiscal Year 1997 and 1998 budgets, were included in the Budget Act,
to offset incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions.
The Renter's Tax Credit was suspended for another year, saving approximately
$500 million. The Legislature has not made any decision on conformity of State
tax laws to the recent Federal tax reduction bill; a comprehensive review of
this subject is expected to take place next year.
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the Federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
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that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
The Department of Finance released updated estimates for the 1997-98
Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year
Budget Proposal. Total revenues and transfers are projected at $52.9 billion,
up approximately $360 million from the Budget Act projection. Expenditures for
the fiscal year are expected to rise approximately $200 million above the
original Budget Act, to $53.0 billion. The balance in the budget reserve, the
SFEU, is projected to be $329 million at June 30, 1998, compared to $461 million
at June 30, 1997.
Proposed 1998-99 Fiscal Year Budget
On January 9, 1998, the Governor released his Budget Proposal for the
1998-99 Fiscal Year (the "Governor's Budget"). The Governor's Budget projects
total General Fund revenues and transfers of $55.4 billion, a $2.5 billion
increase (4.7%) over revised 1997-98 revenues. This revenue increase takes into
account reduced revenues of approximately $600 million from the 1997 tax cut
package, but also assumes approximately $500 million additional revenues
primarily associated with capital gains realizations. The Governor's Budget
notes, however, that capital gains activity and the resultant revenues derived
from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion, an increase of $2.4 billion (4.5%) above the revised 1997-98 level.
The Governor's Budget includes funds to pay the interest claim relating to the
court decision on pension fund payments in PERS v. Wilson (see "1997-98 Fiscal
--------------
Year" above). The Governor's Budget projects that the State will carry out its
normal intra-year cash flow external borrowing in 1998-99, in an estimated
amount of $3.0 billion. The Governor's Budget projects that the budget reserve,
the SFEU, will be $296 million at June 30, 1999, slightly lower than the
projected level of PERS liability at June 30, 1998.
----
The Governor's Budget projects Special Fund revenues of $14.7 billion,
and Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A
total of $3.2 billion of bond fund expenditures are also proposed.
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.
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In April 1996, the County emerged from bankruptcy after closing on a
$900 million recovery bond transaction. 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. Settlement discussions involving a number of the
defendants have occurred and some agreements in principle have been reached.
However, until any such agreements become final and any remaining litigation is
resolved, it is impossible to determine the ultimate impact of the bankruptcy
and its aftermath on these various agencies and their claims.
In May 1996, a taxpayer action was filed against the City of San Diego
("San Diego") and the San Diego Convention Center Expansion Authority (the
"Authority"), challenging the validity of a lease revenue financing involving a
lease (the "San Diego Lease") having features similar to the leases commonly
used in California lease-based financings such as certificates of participation
(the "Rider Case"). The Rider Case plaintiffs alleged that voter approval is
required for the San Diego Lease because: (a) the lease constituted
indebtedness prohibited by Article XVI, Section l8 of the California
Constitution without a two-thirds vote of the electorate; and (b) San Diego was
prohibited under its charter from issuing bonds without a two-thirds vote of the
electorate, and the power of the Authority, a joint powers' authority (of which
San Diego is a member), to issue bonds is no greater than the power of San
Diego. In response to San Diego's motion for summary judgment. the trial court
rejected the plaintiffs' arguments and ruled that the San Diego Lease was
constitutionally valid and that the Authority's related lease revenue bonds did
not require voter approval. The plaintiffs appealed the matter to the Court of
Appeals for the Fourth District, which affirmed the validity of the San Diego
Lease and of the lease revenue bond financing arrangements. The plaintiffs then
filed a petition for review with the California State Supreme Court, and, on
April 2, 1997, the Court granted the plaintiff's petition for review. A
decision from the Supreme Court is expected to be decided within the 1998 term.
Constitutional, Legislative and Other Factors
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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.
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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 payers 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 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
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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.
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.
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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 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.
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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 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
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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. 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;
4. Prohibits the imposition of ad valorem taxes on real property by
local governmental entities except as permitted by Article XIIIA;
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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
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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 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.
-18-
<PAGE>
Proposition 218. On November 5, 1996, the voters of the State
approved Proposition 218, a constitutional initiative, entitled the "Right to
Vote on Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C
and XIII D to the California Constitution and contains a number of interrelated
provisions affecting the ability of local governments to levy and collect both
existing and future taxes, assessments, fees and charges. Proposition 218
became effective on November 6, 1996. The Sponsors are unable to predict
whether and to what extent Proposition 218 may be held to be constitutional or
how its terms will be interpreted and applied by the courts. However, if
upheld, Proposition 218 could substantially restrict certain local governments'
ability to raise future revenues and could subject certain existing sources of
revenue to reduction or repeal, and increase local government costs to hold
elections, calculate fees and assessments, notify the public and defend local
government fees and assessments in court.
Article XIII C of Proposition 218 requires majority voter approval for
the imposition, extension or increase of general taxes and two-thirds voter
approval for the imposition, extension or increase of special taxes, including
special taxes deposited into a local government's general fund. Proposition 218
also provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the
initiative power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were imposed. This extension of the initiative power to some
extent constitutionalizes the March 6, 1995 State Supreme Court decision in
Rossi v. Brown, which upheld an initiative that repealed a local tax and held
that the State constitution does not preclude the repeal, including the
prospective repeal, of a tax ordinance by an initiative, as contrasted with the
State constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of Proposition 218,
by its terms, applies to all local taxes, assessments, fees and charges and is
not limited to local taxes, assessments, fees and charges that are property
related.
Article XIII D of Proposition 218 adds several new requirements making
it generally more difficult for local agencies to levy and maintain
"assessments" for municipal services and programs. "Assessment" is defined to
mean any levy or charge upon real property for a special benefit conferred upon
the real property.
-19-
<PAGE>
Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government upon
a parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30,
1997, existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenue
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge
may be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or charge
may be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
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).
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
-20-
<PAGE>
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, Inc., 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 financial institutions ("Shareholder Organizations"). Shares
are also offered for sale directly to institutional investors and to members of
the general public. Different types of Customer accounts at the Shareholder
Organizations may be used to purchase Shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically
"sweep" a Customer's account not less frequently than weekly and invest amounts
in excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in Shares selected by the Customer. Investors purchasing Shares may
include officers, directors, or employees of the particular Shareholder
Organization.
Excelsior Tax-Exempt Fund has authorized certain brokers to accept on
its behalf purchase, exchange and redemption orders. Such brokers are
authorized to designate other intermediaries to accept purchase, exchange and
redemption orders on behalf of Excelsior Tax-Exempt Fund. Excelsior Tax-Exempt
Fund will be deemed to have received a purchase, exchange or redemption order
when such an authorized broker or designated intermediary accepts the order.
-21-
<PAGE>
Shares of the Fund are offered for sale at their net asset value per
Share next computed after a purchase order is received in good order by
Excelsior Tax-Exempt Fund's sub-transfer agent or after a purchase order is
accepted by an authorized broker or designated intermediary. Similarly, an
order for the exchange or redemption of Shares will receive the net asset value
per Share next computed after the order is received in good order by Excelsior
Tax-Exempt Fund's sub-transfer agent or after the order is accepted by an
authorized broker or designated intermediary.
Prior to February 14, 1997, Shares of the Fund were offered for sale
with a maximum sales charge of 4.50%. For the fiscal period ended March 31,
1997, total sales charges paid by shareholders of the Fund were $1,126. All
such sales charges were paid to selling dealers.
Excelsior Tax-Exempt Fund may suspend the right of redemption or
postpone the date of payment for Shares for more than 7 days during any period
when (a) trading on the New York Stock Exchange (the "Exchange") is restricted
by applicable rules and regulations of the Securities and Exchange Commission
(the "SEC"); (b) the Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market 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 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 certain circumstances, Excelsior Tax-Exempt Fund may, in its
discretion, accept securities as payment for Shares. Securities acquired in
this manner will be limited to securities issued in transactions involving a
bona fide reorganization or statutory merger, or other transactions involving
- ---------
securities that meet the investment objective and policies of the Fund.
-22-
<PAGE>
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
- --------------------------
An investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the investor
must deposit any outstanding certificates for Shares with Chase Global Funds
Services Company, the Fund's sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of the Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund 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. Customers of Shareholder Organizations may obtain
information on the availability of, and the procedures and fees relating to, the
Systematic Withdrawal Plan directly from their Shareholder Organizations.
Exchange Privilege
- ------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of any other portfolio of
Excelsior Tax-Exempt Fund or Excelsior Funds, Inc. ("Excelsior Fund" and,
collectively with Excelsior Tax-Exempt Fund, the "Companies") or for Trust
Shares of Excelsior Institutional Trust. Shares may be exchanged by wire,
telephone or mail and must be made to accounts of identical registration. There
is no exchange fee imposed by the Companies or Excelsior Institutional Trust.
In order to prevent abuse of this privilege to the disadvantage of other
shareholders, the Companies and Excelsior Institutional Trust reserve the right
to limit the number of exchange requests of investors to no more than six per
year. The Companies and Excelsior Institutional Trust may modify or terminate
the exchange program at any time upon 60 days' written notice to shareholders,
and may reject any exchange request. Customers of Shareholder Organizations may
obtain
-23-
<PAGE>
information on the availability of, and the procedures and fees relating to,
such program directly from their Shareholder Organizations.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged Shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Other Investor Programs
- -----------------------
As described in the Prospectus, Shares of the Fund may be purchased in
connection with the Automatic Investment Program. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.
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.
Prior to December 28, 1995, Excelsior Tax-Exempt Fund was known as "UST Master
Tax-Exempt Funds, Inc."
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
-24-
<PAGE>
by class, except as otherwise required by the 1940 Act or other applicable law
or when the matter to be voted upon affects only the interests of the
shareholders of a particular class. Voting rights are not cumulative and,
accordingly, the holders of more than 50% of the aggregate of the outstanding
shares of Excelsior Tax-Exempt Fund may elect all of Excelsior Tax-Exempt Fund's
directors, regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as Excelsior Tax-Exempt Fund shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical or that the matter does not affect any
interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent public
accountants 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.
-25-
<PAGE>
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:
-26-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Board, Retired; Director of Excelsior Fund
238 June Road President & Treasurer and Excelsior Tax-Exempt Fund (since
Stamford, CT 06903 1995); Trustee of Excelsior Funds and
Age: 67 Excelsior Institutional Trust (since
1995); Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York
(from February 1990 until September
1995); and Chairman, U.S. Trust
Connecticut (from March 1993 to May
1997).
Donald L. Campbell Director Retired; Director of Excelsior Fund
333 East 69th Street and Excelsior Tax-Exempt Fund (since
Apt. 10-H 1984); Director of UST Master
New York, NY 10021 Variable Series, Inc. (from 1994 to
Age: 72 June 1997); Trustee of Excelsior
Institutional Trust (since 1995); and
Director, Royal Life Insurance Co. of
New York (since 1991).
</TABLE>
/1/ This director is considered to be an "interested person" of Excelsior Tax-
Exempt Fund as defined in the 1940 Act.
-27-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Rodman L. Drake Director Director, Excelsior Fund and
Continuation Investments Group, Inc. Excelsior Tax-Exempt Fund (since
1251 Avenue of the Americas, 9th Floor 1996); Trustee, Excelsior
New York, NY 10020 Institutional Trust and Excelsior
Age: 55 Funds (since 1994); Director, Parsons
Brinkerhoff Energy Services Inc.
(since 1996); Director, Parsons
Brinkerhoff, Inc. (engineering firm)
(since 1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment
and consulting firm) (1994-1997);
Director, Hyperion Total Return Fund,
Inc. and four other funds for which
Hyperion Capital Management, Inc.
serves as investment adviser (since
1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993
to 1996); Director, The Latin America
Smaller Companies Fund, Inc. (since
1993); Member of Advisory Board,
Argentina Private Equity Fund L.P.
(from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and
Director, Mueller Industries, Inc.
(from 1992 to 1994).
Joseph H. Dugan Director Retired; Director of Excelsior Fund
913 Franklin Lake Road and Excelsior Tax-Exempt Fund (since
Franklin Lakes, NJ 07417 1984); Director of UST Master
Age: 73 Variable Series, Inc. (from 1994 to
June 1997); and Trustee of Excelsior
Institutional Trust (since 1995).
Wolfe J. Frankl Director Retired; Director of Excelsior Fund
2320 Cumberland Road and Excelsior Tax-Exempt Fund (since
Charlottesville, VA 1986); Director of UST Master
22901 Variable Series, Inc. (from 1994 to
Age: 77 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
W. Wallace McDowell, Jr. Director Director, Excelsior Fund and
c/o Prospect Capital Excelsior Tax-Exempt Fund (since
Corp. 1996); Trustee of Excelsior Funds and
43 Arch Street Excelsior Institutional Trust (since
Greenwich, CT 06830 1994); Private Investor (since 1994);
Age: 61 Managing Director, Morgan Lewis
Githens & Ahn (from 1991 to 1994);
and Director, U.S. Homecare
Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children's
Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and
Jack Morton Productions (since 1987).
Jonathan Piel Director Director, Excelsior Fund and
558 E. 87th Street Excelsior Tax-Exempt Fund (since
New York, New York 10128 1996); Trustee, Excelsior Funds and
Age: 59 Excelsior Institutional Trust (since
1994); Vice President and Editor,
Scientific American, Inc. (from 1986
to 1994); Director, Group for The
South Fork, Bridgehampton, New York
(since 1993); and Member, Advisory
Committee, Knight Journalism
Fellowships, Massachusetts Institute
of Technology (since 1984).
Robert A. Robinson Director Director of Excelsior Fund and
Church Pension Fund Excelsior Tax-Exempt Fund (since
800 Second Avenue 1987); Director of UST Master
New York, NY 10017 Variable Series, Inc. (from 1994 to
Age: 72 June 1997); Trustee of Excelsior
Institutional Trust (since 1995);
President Emeritus, The Church
Pension Fund and its affiliated
companies (since 1966); Trustee, H.B.
and F.H. Bugher Foundation and
Director of its wholly-owned
subsidiaries--Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1995);
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since
1995).
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Alfred C. Tannachion/2/ Director Retired; Director of Excelsior Fund
6549 Pine Meadows Drive and Excelsior Tax-Exempt Fund (since
Spring Hill, FL 34606 1985); Chairman of the Board of
Age: 72 Excelsior Fund and Excelsior
Tax-Exempt Fund (1991-1997) and
Excelsior Institutional Trust
(1996-1997); President and Treasurer
of Excelsior Fund and Excelsior
Tax-Exempt Fund (1994-1997) and
Excelsior Institutional Trust
(1996-1997); Chairman of the Board,
President and Treasurer of UST Master
Variable Series, Inc. (1994-1997);
and Trustee of Excelsior
Institutional Trust (since 1995).
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 55
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker
Philadelphia National Bank Building Biddle & Reath LLP.
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 39
Edward Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Global Funds Services Company
Services Company (November 1996 to present); and
73 Tremont Street Officer and Manager of Financial
Boston, MA 02108-3913 Reporting, Investors Bank & Trust
Age: 37 Company (January 1991 to November
1996).
</TABLE>
/2/ This director is considered to be an "interested person" of Excelsior
Tax-Exempt Fund as defined in the 1940 Act.
-30-
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Excelsior Tax- During Past 5 years and
Name and Address Exempt Fund Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
John M. Corcoran Assistant Treasurer Vice President, Director of Fund
Chase Global Funds Administration, Chase Global Funds
Services Company Services Company (since April 1998);
73 Tremont Street Vice President, Senior Manager of
Boston, MA 02108-3913 Fund Administration, Chase Global
Age: 33 Funds Services Company (from July
1996 to April 1998); Second Vice
President, Manager of Fund
Administration, Chase Global Funds
Services Company (from October 1993
to July 1996); and Audit Manager,
Ernst & Young LLP (from August 1987
to September 1993).
</TABLE>
Each director of Excelsior Tax-Exempt Fund receives an annual fee of $9,000
plus a meeting fee of $1,500 for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum for services in such capacity.
Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are partners,
receives legal fees as counsel to Excelsior Tax-Exempt Fund. The employees of
Chase Global Funds Services Company do not receive any compensation from
Excelsior Tax-Exempt Fund for acting as officers of Excelsior Tax-Exempt Fund.
No person who is currently an officer, director or employee of the Investment
Adviser serves as an officer, director or employee of Excelsior Tax-Exempt Fund.
As of July 8, 1998, the directors and officers of Excelsior Tax-Exempt Fund as a
group owned beneficially less than 1% of the outstanding shares of each fund of
Excelsior Tax-Exempt, and less than 1% of the outstanding shares of all funds of
Excelsior Tax-Exempt Fund in the aggregate.
The following chart provides certain information about the fees
received by Excelsior Tax-Exempt Fund's directors in the most recently completed
fiscal year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation from
Aggregate Accrued as Excelsior Tax-Exempt
Compensation from Part of Fund and Fund
Name of Excelsior Fund Complex* Paid
Person/Position Tax-Exempt Fund Expenses to Directors
- --------------------------- ----------------- ---------- --------------------
<S> <C> <C> <C>
Donald L. Campbell $15,000 None $38,000(3)**
Director
</TABLE>
-31-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Rodman L. Drake $13,500 None $39,500(4)**
Director
Joseph H. Dugan $15,000 None $38,000(3)**
Director
Wolfe J. Frankl $15,000 None $36,500(3)**
Director
W. Wallace McDowell $13,500 None $38,000(4)**
Director
Jonathan Piel $15,000 None $43,000(4)**
Director
Robert A. Robinson $15,000 None $38,000(3)**
Director
Alfred C. Tannachion $15,000 None $38,000(3)**
Director
Frederick S. Wonham $20,000 None $53,000(4)**
Chairman of the Board,
President and Treasurer
</TABLE>
- ---------------------------
* The "Fund Complex" consists of Excelsior Fund, Excelsior Tax-Exempt Fund,
Excelsior Institutional Trust and Excelsior Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.
-32-
<PAGE>
Investment Advisory, Sub-Advisory and Administration Agreements
- ---------------------------------------------------------------
United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company of Connecticut ("U.S. Trust Connecticut" and, collectively
with U.S. Trust New York, "U.S. Trust" or the "Investment Adviser") serve as
Investment Adviser to the Fund. U.S. Trust Company, N.A. (formerly known as
"U.S. Trust Company of California") serves as the Fund's sub-adviser (the "Sub-
Adviser"). In the Investment Advisory and Sub-Advisory Agreements, U.S. Trust
and the Sub-Adviser, respectively, have 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.
Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Fund pursuant to an advisory agreement substantially similar to
the Investment Advisory Agreement currently in effect for the Fund.
For the fiscal year ended March 31, 1998, the Investment Adviser
waived its entire advisory fee totaling $129,359 and reimbursed expenses
totaling $63,053 with respect to the Fund. For the same period, the Sub-Adviser
waived its entire sub-advisory fee totaling $129,359 with respect to the Fund.
For the period from October 1, 1996 (commencement of operations)
through March 31, 1997, U.S. Trust New York waived its entire advisory fee
totaling $19,111 and reimbursed expenses totaling $14,586 with respect to the
Fund. For the same period, the Sub-Adviser waived its entire sub-advisory fee
totaling $19,111 with respect to the Fund.
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 that the Investment
Adviser shall be jointly, but not severally, liable for a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
advisory services or a loss resulting from willful misfeasance, bad faith or
gross negligence 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. In addition, the Investment Adviser
has undertaken in the Investment Advisory Agreement to maintain its policy and
practice of conducting its Asset Management Group independently of its Banking
Group.
Chase Global Funds Services Company ("CGFSC"), Federated
Administrative Services, an affiliate of the Distributor, and U.S. Trust
Connecticut (the "Administrators") 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
-33-
<PAGE>
capital gains or losses, if any, of the Fund. The Administrators prepare
semiannual reports to the SEC, prepare Federal and state tax returns, prepare
filings with state securities commissions, arrange for and bear the cost of
processing Share purchase and redemption orders, maintain the Fund's financial
accounts and records, and generally assist in all aspects of the Fund's
operations.
Prior to May 16, 1997, CGFSC, Federated Administrative Services and
U.S. Trust New York served as the Fund's administrators pursuant to an
administrative agreement substantially similar to the Administration Agreement
currently in effect for the Fund.
For the fiscal year ended March 31, 1998, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust combined
administration fees totaling $39,584 with respect to the Fund.
For the period from October 1, 1996 (commencement of operations)
through March 31, 1997, Excelsior Tax-Exempt Fund paid CGFSC, Federated
Administrative Services and U.S. Trust New York combined administration fees
totaling $5,856 with respect to the Fund.
Shareholder Organizations
- -------------------------
As stated in the Prospectus, Excelsior Tax-Exempt Fund has entered
into agreements with certain Shareholder Organizations. Such agreements require
the Shareholder Organizations to provide shareholder administrative services to
their Customers who beneficially own Shares in consideration for the Fund's
payment of not more than the annual rate of 0.40% of the average daily net
assets of the Fund's Shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recordholder of Shares;
(b) assisting in processing purchase, exchange and redemption transactions; (c)
providing periodic statements showing a Customer's account balances and
confirmations of transactions by the Customer; (d) providing tax and dividend
information to shareholders as appropriate; (e) transmitting proxy statements,
annual reports, updated prospectuses and other communications from Excelsior
Tax-Exempt Fund to Customers; and (f) providing or arranging for the provision
of other related services.
Excelsior Tax-Exempt Fund's agreements with Shareholder 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 Shareholder
Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of 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 Shareholder Organizations must be approved by a majority of the Board of
Directors (including a
-34-
<PAGE>
majority of the Disinterested Directors). So long as Excelsior Tax-Exempt Fund's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of Excelsior Tax-Exempt Fund's Board of Directors who
are not "interested persons" (as defined in the 1940 Act) of Excelsior Tax-
Exempt Fund will be committed to the discretion of such Disinterested Directors.
For the fiscal year ended March 31, 1998, payments to Shareholder
Organizations totaled $91,274 with respect to the Fund, all of which was paid to
affiliates of U.S. Trust.
For the period from October 1, 1996 (commencement of operations)
through March 31, 1997, payments to Shareholder Organizations totaled $16,689
with respect to the Fund, all of which was paid to affiliates of U.S. Trust.
Expenses
- --------
Except as otherwise noted, the Investment Adviser, Sub-Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Fund bears the expenses incurred in its operations. Expenses of
the Fund 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, sub-
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 brokerage fees and commissions in connection
with the purchase of portfolio securities.
Custodian and Transfer Agent
- ----------------------------
The Chase Manhattan Bank ("Chase") serves as custodian of the Fund's
assets. Under the Custodian Agreement, Chase has agreed to: (i) maintain a
separate account or accounts in the name of the Fund; (ii) make receipts and
disbursements of money on behalf of the Fund; (iii) collect and receive all
income and other payments and distributions on account of the Fund's portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to Excelsior Tax-Exempt Fund's Board of Directors
concerning the Fund's operations. Chase may, at its own expense, open and
maintain custody accounts with respect to the Fund, with other banks or trust
companies, provided that Chase shall remain liable for the performance of all
its custodial duties under the Custodian Agreement, notwithstanding any
delegation.
U.S. Trust New York serves as the Fund's transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust New York has agreed to: (i)
issue and redeem Shares; (ii) address and mail all communications by the Fund to
its shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for its meetings of
-35-
<PAGE>
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's Board of Directors concerning
the Fund's operations. For its transfer agency, dividend disbursing, and
subaccounting services, U.S. Trust New York is entitled to receive $15.00 per
annum per account and subaccount. In addition, U.S. Trust New York is entitled
to be reimbursed for its out-of-pocket expenses for the cost of forms, postage,
processing purchase and redemption orders, handling of proxies, and other
similar expenses in connection with the above services.
U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. For the services
provided by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum
per account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from Excelsior Tax-Exempt Fund for any of its sub-transfer agency
services. U.S. Trust New York may, from time to time, enter into sub-transfer
agency arrangements with third party providers of transfer agency services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of Excelsior Tax-Exempt Fund's Board of
Directors, the Investment Adviser and Sub-Adviser are responsible for, make
decisions with respect to, and place 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.
-36-
<PAGE>
The Investment Advisory and Sub-Advisory Agreements provide that, in
executing portfolio transactions and selecting brokers or dealers, the
Investment Adviser and Sub-Adviser will seek to obtain the best net price and
the most favorable execution. The Investment Adviser and Sub-Adviser shall
consider factors they deem 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-Advisory Agreements
authorize 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
effecting the same transaction, provided that the Investment Adviser or Sub-
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 or Sub-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 or 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 SEC.
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
-37-
<PAGE>
be sold or purchased for other investment companies or common trust funds in
order to obtain best execution.
Excelsior Tax-Exempt Fund is required to identify any securities of
its regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents held by the Fund as of the close of the most recent fiscal year.
As of March 31, 1998, the Fund did not hold any securities of Excelsior Tax-
Exempt Fund's regular brokers or dealers or their parents.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Excelsior Tax-Exempt Fund. The Fund's Financial
Highlights included in the Prospectus and the financial statements for the
fiscal year ended March 31, 1998 incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
included in their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
Excelsior Tax-Exempt Fund, and Mr. Malloy, Assistant Secretary of Excelsior Tax-
Exempt Fund, are partners), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, 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
-38-
<PAGE>
tax-exempt income irrespective of fluctuations in principal. Shares of the Fund
will not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional benefit from
the Fund's dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Fund may
not be an appropriate investment for entities which are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under the Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S Corporation and its shareholders.
In order for the Fund to pay exempt-interest dividends for any taxable
year, at least 50% of the aggregate value of the Fund's portfolio must consist
of exempt-interest obligations at the close of each quarter of its taxable year.
Within 60 days after the close of the taxable year, the Fund will notify its
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by the Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code received
by the Fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as exempt-
interest dividends 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 Fund's 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.
-39-
<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."
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 (including interest income on
California Municipal Obligations for franchise tax purposes). 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 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
Obligations"), 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 Obligations and certain U.S.
Government and U.S. Possession obligations. A "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.
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
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<PAGE>
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 Obligations 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 Obligations 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 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.
* * *
-41-
<PAGE>
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
local taxes.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
The Fund may advertise the standardized effective 30-day (or one
month) yields calculated in accordance with the method prescribed by the SEC for
mutual funds. Such yield will be calculated separately for the Fund according
to the following formula:
a-b
Yield = 2 [(----- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = average daily number of Shares outstanding that were
entitled to receive dividends.
d = maximum offering price per Share on the last day of the
period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), the Fund computes the yield to maturity of any
debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. The
Fund calculates interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.
-42-
<PAGE>
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Fund to all shareholder accounts and to the
particular series of Shares in proportion to the length of the base period and
the Fund's mean (or median) account size. Undeclared earned income will be
subtracted from the maximum offering price per Share (variable "d" in the
formula).
Based on the foregoing calculations, the Fund's standardized effective
yield for the 30-day period ended March 31, 1998 was 3.53%.
The "tax-equivalent" yield of the Fund is computed by: (a) dividing
the portion of the yield (calculated as above) that is exempt from Federal
income tax by one minus a stated Federal income tax rate and (b) adding that
figure to that portion, if any, of the yield that is not exempt from Federal
income tax. Tax-equivalent yields assume the payment of Federal income taxes at
a rate of 31%. Based on the foregoing calculation, the tax-equivalent yield of
the Fund for the 30-day period ended March 31, 1998 was 5.12%.
The Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV 1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year (or
other) periods at the end of the applicable period (or a
fractional portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
The calculation is made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
Share existing on the reinvestment date, (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. The average annual total returns for the Fund's Shares for
the one year period ended March 31, 1998 and for the period from October 1, 1996
(commencement of operations) to March 31, 1998 were 7.42% and 5.63%,
respectively.
-43-
<PAGE>
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 total return and yield of the Fund may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the total return and/or yield of the Fund may be compared to data
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
and Weisenberger Investment Company Service. Total return and yield data as
reported in national financial publications such as Money Magazine, Forbes,
----- -------- ------
Barron's, The Wall Street Journal and The New York Times, or in publications of
- -------- --- ---- ------ ------- --- --- ---- -----
a local or regional nature, may also be used in comparing the performance of the
Fund. Advertisements, sales literature or reports to shareholders may from time
to time also include a discussion and analysis of the Fund's performance,
including without limitation, those factors, strategies and technologies that
together with market conditions and events, materially affected the Fund's
performance.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciations of the Fund would increase the value, not only
of 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, advertisements, sales literature or shareholder
communications may include a discussion of
-44-
<PAGE>
certain attributes or benefits to be derived by an investment in the Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to the Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of Excelsior Tax-Exempt Fund not belonging to a particular portfolio of
Excelsior Tax-Exempt Fund. In determining the net asset value of the Fund's
Shares, assets belonging to the Fund allocable to Shares are charged with the
direct liabilities of the Fund allocable to Shares and with a share of the
general liabilities of Excelsior Tax-Exempt Fund which are normally allocated in
proportion to the relative asset values of Excelsior Tax-Exempt Fund's
portfolios at the time of allocation. Subject to the provisions of Excelsior
Tax-Exempt Fund's Charter, determinations by the Board of Directors as to the
direct and allocable liabilities, and the allocable portion of any general
assets with respect to the Fund, are conclusive.
As of July 8, 1998, U.S. Trust and its affiliates held of record
substantially all of the outstanding shares of Excelsior Tax-Exempt Fund as
agent or custodian for their customers, but did not own such shares beneficially
because they did not have voting or investment discretion with respect to such
shares.
As of July 8, 1998, the name, address and percentage ownership of each
person, in addition to U.S. Trust and its affiliates, that beneficially owned 5%
or more of the outstanding Shares of the Fund were as follows: Donald G.
Goodwin Living Trust, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 6.97%.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto in Excelsior Tax-
Exempt Fund's Annual Report to Shareholders for the fiscal year ended March 31,
1998 (the "1998 Annual Report") for the Fund are incorporated in this Statement
of Additional Information by reference. No other parts of the 1998 Annual
Report are incorporated by reference herein. The financial statements included
in the 1998 Annual Report for the Fund have been audited by Excelsior Tax-Exempt
Fund's independent auditors, Ernst & Young LLP, whose reports thereon also
appear in the 1998 Annual Report and are incorporated herein by reference. Such
financial statements have been incorporated herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
Additional copies of the 1998 Annual Report may be obtained at no charge by
telephoning CGFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
-45-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1." However, the obligor's capacity to meet its financial commitment
on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1."
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
A-3
<PAGE>
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
A-4
<PAGE>
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB," but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation 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 or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - 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
A-5
<PAGE>
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in 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.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
A-6
<PAGE>
"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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The
A-7
<PAGE>
capacity for timely payment of financial commitments is adequate, but adverse
changes in circumstances and in economic conditions are more likely to impair
this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC" and "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these 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-8
<PAGE>
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
A-9
<PAGE>
"MIG-1"/"VMIG-1" - This designation denotes 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" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
EXCELSIOR TAX-EXEMPT FUNDS, INC.
FORM N-1A
---------
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Audited Financial Highlights for the Registrant's Tax-
Exempt Money Fund, Intermediate-Term Tax-Exempt Fund
and Long-Term Tax-Exempt Fund for the fiscal years
ended March 31, 1989 through March 31, 1998; New York
Intermediate-Term Tax-Exempt Fund for the period from
May 31, 1990 (commencement of operations) to March 31,
1991 and for the fiscal years ended March 31, 1992
through March 31, 1998; Short-Term Tax-Exempt
Securities Fund for the period from December 31, 1992
(commencement of operations) to March 31, 1993 and for
the fiscal years ended March 31, 1994 through March 31,
1998; and for the California Tax-Exempt Income Fund for
the period from October 1, 1996 (commencement of
operations) to March 31, 1998.
(2) Incorporated by reference into Part B are the following audited
financial statements for the Tax-Exempt Money, Intermediate-
Term Tax-Exempt, Long-Term Tax-Exempt, New York Intermediate-
Term Tax-Exempt, Short-Term Tax-Exempt Securities and
California Tax-Exempt Income Funds:
. Statements of Assets and Liabilities as of March 31, 1998;
. Statements of Operations for the year ended March 31, 1998;
. Statements of Changes in Net Assets for the year ended
March 31, 1998;
. Portfolio of Investments as of March 31, 1998;
. Notes to Financial Statements; and
<PAGE>
. Report of Independent Auditors for the fiscal year ended
March 31, 1998.
(b) Exhibits:
(1) (1) Articles of Incorporation of Registrant dated as of August 7,
1984 (7).
(a) Articles Supplementary of Registrant dated as of April 27,
1990 (7).
(b) Articles Supplementary of Registrant dated as of December 23,
1992 (7).
(c) Articles Supplementary of Registrant dated December 27, 1995
(4).
(2) (2) Amended and Restated Bylaws of Registrant dated February 10,
1995 (7).
(a) Amendment No. 1 to Amended and Restated Bylaws of Registrant
dated May 16, 1997 (7).
(3) None.
(4) (3) Articles VI, VII, VIII and X of Registrant's Articles of
Incorporation dated as of August 7, 1984 (7).
(a) Articles I and IV of Registrant's Amended and Restated
By-Laws dated February 10, 1995 (7).
(5) (4) Investment Advisory Agreement among Registrant, U.S. Trust
Company of Connecticut and United States Trust Company of New York dated
May 16, 1997 with respect to the Tax-Exempt Money Fund, Intermediate-Term
Tax-Exempt Fund and Long-Term Tax-Exempt Fund (6).
(a) Investment Advisory Agreement among Registrant, U.S. Trust
Company of Connecticut and United States Trust Company of New York dated
May 16, 1997 with respect to the New York Intermediate-Term Tax-Exempt
Fund, Short-Term Tax-Exempt Securities Fund and California Tax-Exempt
Income Fund (6).
(b) Sub-Advisory Agreement among U.S. Trust Company of
Connecticut, United States Trust Company of New York and United States
Trust Company of California dated May 16, 1997 with respect to the
California Tax-Exempt Income Fund (7).
-2-
<PAGE>
(6) (5) Distribution Contract dated August 1, 1995 between Registrant
and Edgewood Services, Inc. (3).
(a) Exhibit A dated September 25, 1996 to the Distribution
Contract between Registrant and Edgewood Services, Inc. (5).
(7) None.
(8) Custody Agreement dated September 1, 1995 (as amended and restated
on August 1, 1997) between Registrant and The Chase Manhattan Bank (7).
(9) (6) Amended and Restated Administrative Services Plan and Related
Form of Shareholder Servicing Agreement dated February 21, 1994, as
amended as of May 16, 1997 (7).
(a) Administration Agreement dated May 16, 1997 among Registrant,
Chase Global Funds Services Company, Federated Administrative Services and
U.S. Trust Company of Connecticut (6).
(b) Mutual Funds Transfer Agency Agreement dated as of September
1, 1995 between Registrant and United States Trust Company of New York (7).
(c) Mutual Funds Sub-Transfer Agency Agreement dated as of
September 1, 1995 between United States Trust Company of New York and Chase
Global Funds Services Company (7).
(10) Opinion of counsel (8).
(11) (7) Consent of Drinker Biddle & Reath LLP (8).
(a) Consent of Ernst & Young LLP (8).
(12) None.
(13) (8) Purchase Agreement between Registrant and Shearson Lehman
Brothers Inc. dated February 6, 1985 (7).
(a) Purchase Agreement between Registrant and Edgewood Services,
Inc. dated September 25, 1996 (5).
(14) None.
(15) None.
(16) (9) Schedule for computation of performance quotation (1).
-3-
<PAGE>
(a) Schedule for computation of performance quotation (2).
(17) (10) Financial Data Schedule as of March 31, 1998 for the Tax-
Exempt Money Fund (8).
(a) Financial Data Schedule as of March 31, 1998 for the
Intermediate-Term Tax-Exempt Fund (8).
(b) Financial Data Schedule as of March 31, 1998 for the Long-
Term Tax-Exempt Fund (8).
(c) Financial Data Schedule as of March 31, 1998 for the New York
Intermediate-Term Tax-Exempt Fund (8).
(d) Financial Data Schedule as of March 31, 1998 for the Short-
Term Tax-Exempt Securities Fund (8).
(e) Financial Data Schedule as of March 31, 1998 for the
California Tax-Exempt Income Fund (8).
(18) None.
Notes:
- -----
(1) Incorporated by reference to Registrant's and Excelsior Funds, Inc.'s joint
Post-Effective Amendments Nos. 12 and 10, respectively, to their
Registration Statements on Form N-1A filed May 31, 1991.
(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 15
to its Registration Statement on Form N-1A filed August 2, 1993.
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 18
to its Registration Statement on Form N-1A filed August 1, 1995.
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 19
to its Registration Statement on Form N-1A filed July 18, 1996.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 21
to its Registration Statement on Form N-1A filed March 31, 1997.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 23
to its Registration Statement on Form N-1A filed July 31, 1997.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 24
to its Registration Statement on Form N-1A filed May 15, 1998.
(8) Filed herewith.
-4-
<PAGE>
Item 25. Persons Controlled By or Under
Common Control with Registrant
------------------------------
Registrant is controlled by its Board of Directors.
Item 26. Number of Holders of Securities
-------------------------------
The following information is as of May 6, 1998:
Number of
Title of Class Record Holders
-------------- --------------
Class A Common Stock (Tax-Exempt Money Fund) 4,188
Class B Common Stock (Intermediate-Term Tax-Exempt Fund) 1,245
Class C Common Stock (Long-Term Tax-Exempt Fund) 837
Class D Common Stock (New York Intermediate-Term Tax-Exempt Fund) 493
Class E Common Stock (California Tax-Exempt Income Fund) 169
Class F Common Stock (Short-Term Tax-Exempt Securities Fund) 372
Item 27. Indemnification
---------------
Article VII, Section 3 of Registrant's Articles of Incorporation, incorporated
herein by reference to Exhibit (1)(a) hereto, and Article VI, Section 2 of
Registrant's Bylaws, incorporated herein by reference to Exhibit (2)(a) hereto,
provide for the indemnification of Registrant's directors and officers.
Indemnification of Registrant's principal underwriter, custodian, transfer agent
and co-administrators is provided for, respectively, in Section 1.11 of the
Distribution Contract incorporated herein by reference to Exhibit (6)(a) hereto,
Section 12 of the Custody Agreement incorporated herein by reference to Exhibit
(8)(a) hereto, Section 7 of the Mutual Funds Transfer Agency Agreement
incorporated herein by reference to Exhibit 9(c) hereto, and Section 6 of the
Administration Agreement incorporated herein by reference to Exhibit 9(b)
hereto. Registrant has obtained from a major insurance carrier a directors' and
officers' liability policy covering certain types of errors and omissions. In
no event will Registrant indemnify any of its directors, officers, employees, or
agents against any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith, gross negligence in the
performance of his duties, or by reason of his reckless disregard of the duties
involved in the conduct of his office or arising under his agreement with
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release No. 11330 under the Investment Company Act of 1940 in
connection with any indemnification.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or
-5-
<PAGE>
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
(a) U.S. Trust Company of Connecticut:
U.S. Trust Company of Connecticut ("U.S. Trust CT") is a
Connecticut state bank and trust company located in Stamford, Connecticut. Set
forth below are the names and principal businesses of the directors and certain
senior executive officers of U.S. Trust CT, including those who are engaged in
any other business, profession, vocation or employment of a substantial nature.
-6-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust CT Name Occupation Business
- ----------- -------------------- ------------------- ------------------
<S> <C> <C> <C>
Director John N. Irwin Lawyer
1133 Avenue of the
Americas
New York, NY 10035
Director June Noble Larkin Foundation Not-for-Profit
Edward John Noble Director Organization
Foundation, Inc.
32 East 57th Street
New York, NY 10022
Director Tucker H. Warner Co-Founder, Consulting Firm
The Nutmeg Financial Partner &
Group, LLC Director
1157 Highland Avenue
West
Cheshire, CT 06903
Director Thomas C. Clark Managing Director, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
11 West 54th Street
New York, NY 10019
Director Maribeth S. Rahe Vice Chairman, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
Director Frederick B. Taylor Vice Chairman, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust CT Name Occupation Business
- ----------- -------------------- ------------------- ------------------
<S> <C> <C> <C>
Director Kenneth G. Walsh Executive Vice Asset Management,
United States Trust President, United Investment and
Company of New York States Trust Company Fiduciary Services
114 West 47th Street of New York
New York, NY 10036
Director, William V. Ferdinand Managing Director Asset Management,
Managing U.S. Trust Company & CIO Fiduciary Services
Director & of Connecticut & Private Banking
CIO 225 High Ridge Road
Stamford, CT 06905
Director, W. Michael Funck President & CEO Asset Management,
President & U.S. Trust Company Fiduciary Services
CEO of Connecticut & Private Banking
225 High Ridge Road
Stamford, CT 06905
Vice Presi- Neil M. McDonnell Vice President & Asset Management,
dent & U.S. Trust Company Treasurer Fiduciary Services
Treasurer of Connecticut & Private Banking
225 High Ridge Road
Stamford, CT 06905
Vice Presi- Alberto Rodriguez Vice President & Asset Management,
dent & U.S. Trust Company Secretary Fiduciary Services
Secretary of Connecticut & Private Banking
225 High Ridge Road
Stamford, CT 06905
</TABLE>
(b) United States Trust Company of New York:
United States Trust Company of New York ("U.S. Trust NY") is a full-
service state-chartered bank located in New York, New York. Set forth below are
the names and principal businesses of the directors and certain senior executive
officers of U.S. Trust NY, including those who are engaged in any other
business, profession, vocation, or employment of a substantial nature.
-8-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- ----------- -------------------- ------------------- --------
<S> <C> <C> <C>
Director Eleanor Baum Dean of School Academic
The Cooper Union for of Engineering
the Advancement
of Science & Art
51 Astor Place
New York, NY 10003
Director Samuel C. Butler Partner in Cravath, Law Firm
Cravath, Swaine Swaine & Moore
& Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Director Peter O. Crisp Chairman Venture
Venrock Inc. Capital
Room 5600
30 Rockefeller Plaza
New York, NY 10112
Director Antonia M. Grumbach Partner in Patter- Law Firm
Patterson, Belknap, son, Belknap, Webb
Webb & Tyler LLP & Tyler
1133 Avenue of the
Americas
New York, NY 10036
Director, H. Marshall Schwarz Chairman of the Asset Management,
Chairman United States Trust Board & Chief Exe- Investment and
of the Board Company of New York cutive Officer of Fiduciary Services
and Chief 114 West 47th Street U.S. Trust Corp. and
Executive New York, NY 10036 U.S. Trust N.Y.
Officer
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- ----------- -------------------- ------------------- --------
<S> <C> <C> <C>
Director Philippe de Montebello Director of the Art Museum
The Metropolitan Metropolitan
Museum of Art Museum of Art
1000 Fifth Avenue
New York, NY 10028-0198
Director Paul W. Douglas Retired Chairman of Coal Mining,
250 Park Avenue The Pittston Company Transportation
Suite 1800 and Security
New York, NY 10177 Services
Director Frederic C. Hamilton Chairman of the Investment and
The Hamilton Companies Board Venture Capital
1560 Broadway
Suite 2000
Denver, CO 80202
Director John H. Stookey Corporate Director
Per Scholas Inc. and Trustee
131 Walnut Avenue
Bronx, New York 10454
Director Robert N. Wilson Vice Chairman of Health Care
Johnson & Johnson the Board of Johnson Products
One Johnson & & Johnson
Johnson Plaza
New Brunswick, NJ 08933
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- ----------- -------------------- ------------------- --------
<S> <C> <C> <C>
Director Peter L. Malkin Chairman of Law Firm
Wein, Malkin LLP Wein, Malkin
Lincoln Building & Bettex
60 East 42nd Street
New York, NY 10165
Director David A. Olsen Vice Chairman Risk & Insurance
Marsh & McLennan, Services
Inc.
125 Broad Street
New York, NY 10004
Director Richard F. Tucker Retired Vice- Petroleum
P.O. Box 2072 Chairman Mobil and Chemicals
New York, NY 10163 Oil Corporation
Director Carroll L. Wainright, Consulting Partner Law Firm
Jr. of Milbank, Tweed,
Milbank, Tweed, Hadley & McCloy
Hadley & McCloy
One Chase Manhattan
Plaza
New York, NY 10005
Director Ruth A. Wooden President & CEO Not for
The Advertising Profit Public
Council, Inc. Service
261 Madison Avenue Advertising
11th Floor
New York, NY 10016
Executive Paul K. Napoli Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
Director and Maribeth S. Rahe Vice Chairman Asset Management,
Vice Chair- United States Trust Investment and
man Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- ----------- -------------------- ------------------- --------
<S> <C> <C> <C>
Director Frederick B. Taylor Vice Chairman and Asset Management,
Vice Chair- United States Trust Chief Investment Of- Investment and
man and Company of New York ficer of U.S. Trust Fiduciary Services
Chief Invest- 114 West 47th Street Corporation and U.S.
ment Officer New York, NY 10036 Trust N.Y.
Director, Jeffrey S. Maurer President and Asset Management,
President United States Trust Chief Operating Investment and
and Chief Company of New York Officer Fiduciary Services
Operating 114 West 47th Street
Officer New York, NY 10036
Trustee/ Daniel P. Davison Chairman, Christie, Fine Art
Director Christie, Manson Manson & Woods Auctioneer
& Woods International, Inc.
International Inc.
502 Park Avenue
New York, NY 10021
Trustee/ Orson D. Munn Chairman and Investment
Director Munn, Bernhard & Director of Munn, Advisory
Associates, Inc. Bernhard & Asso- Firm
6 East 43rd Street ciates, Inc.
28th Floor
New York, NY 10017
Executive John L. Kirby Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030
Executive Kenneth G. Walsh Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030
Director Philip L. Smith Corporate Director
P.O. Box 386 and Trustee
Ponte Verde Beach,
FL 32004
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- ----------- -------------------- -------------- ------------------
<S> <C> <C> <C>
Executive John C. Hover, II Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030
Executive John M. Deignan Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030
</TABLE>
(c) U.S. Trust Company N.A. (Investment Sub-Adviser for the California
Tax-Exempt Income Fund)
U.S. Trust Company, N.A. (formerly known as U.S. Trust Company of
California). U.S. Trust Company, N.A. ("U.S. Trust N.A.") is national bank
located in Los Angeles, California. Set forth below are the names and principal
businesses of the directors and certain senior executive officers of U.S. Trust
N.A., including those who are engaged in any other business, profession,
vocation, or employment of a substantial nature.
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust N.A. Name Occupation Business
- -------------------- ----------------------- ------------------ ------------------
<S> <C> <C> <C>
Director and William R. Barrett, Jr. Managing Director Asset
Managing Director Management,
Investment and
Fiduciary Services
Director Thomas C. Clark Managing Director Asset Management,
Investment
Director Jeffrey S. Maurer President and Asset Management,
Chief Operating Investment and
Officer Fiduciary Services
Director/Managing Robert M. Raney Managing Director Asset Management,
Director and Chief and Chief Investment and
Investment Officer Investment Officer Fiduciary Services
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust N.A. Name Occupation Business
- -------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C>
Director /President Gregory F. Sanford President and Chief Asset Management,
and Chief Operating Operating Officer Investment and
Fiduciary Services
Director/Chairman Franklin E. Ulf Chairman of the Asset Management,
of the Board Board Investment and
Fiduciary Services
Director and Charles E. Wert Executive Vice Asset Management,
Executive Vice President Investment and
President Fiduciary Services
Director Maribeth S. Rahe Vice Chairman Asset Management,
Investment and
Fiduciary Services
</TABLE>
Item 29. Principal Underwriter
---------------------
(a) Edgewood Services, Inc., the Distributor for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: BT Advisor Funds, BT Pyramid Mutual Funds, BT Investment
Funds, BT Institutional Funds, Deutsche Portfolios, Deutsche Funds, Inc.,
Excelsior Funds, Inc., Excelsior Institutional Trust, Excelsior Funds, FTI
Funds, Fund Manager Portfolios, Great Plains Funds, Old Westbury Funds, Inc.,
Robertsons Stephens Investment Trust, WesMark Funds and WCT Funds.
<TABLE>
<CAPTION>
(b) Names and Principal Positions and Offices with Offices with
Business Addresses the Distributor Registrant
- ---------------------------- ---------------------------------------- ----------------
<S> <C> <C>
Lawrence Caracciolo Director and President,
5800 Corporate Drive Edgewood Services, Inc. --
Pittsburgh, PA 15237-5829
Arthur L. Cherry Director,
5800 Corporate Drive Edgewood Services, Inc. --
Pittsburgh, PA 15237-5829
J. Christopher Donahue Director,
5800 Corporate Drive Edgewood Services, Inc. --
Pittsburgh, PA 15237-5829
Ronald M. Petnuch Vice President,
5800 Corporate Drive Edgewood Services, Inc. --
Pittsburgh, PA 15237-5829
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Thomas P. Schmitt
5800 Corporate Drive Vice President, --
Pittsburgh, PA 15237-5829 Edgewood Services, Inc.
Thomas P. Scholes
5800 Corporate Drive Vice President, --
Pittsburgh, PA 15237-5829 Edgewood Services, Inc.
Ernest L. Linane Assistant Vice President,
5800 Corporate Drive Edgewood Services, Inc. --
Pittsburgh, PA 15237-5829
S. Elliott Cohan Secretary,
5800 Corporate Drive Edgewood Services, Inc. --
Pittsburgh, PA 15237-5829
Thomas J. Ward
5800 Corporate Drive Assistant Secretary, --
Pittsburgh, PA 15237-5829 Edgewood Services, Inc.
Kenneth W. Pegher, Jr.
5800 Corporate Drive Treasurer, --
Pittsburgh, PA 15237-5829 Edgewood Services, Inc.
</TABLE>
(c) Not Applicable.
Item 30. Location of Accounts and Records
--------------------------------
(1) United States Trust Company of New York, 114 W. 47th
Street, New York, NY 10036 (records relating to its functions as investment
adviser and transfer agent).
(2) U.S. Trust Company of Connecticut, 225 High Ridge Road,
East Building, Stamford, Connecticut 06905 (records relating to its function as
investment adviser and co-administrator).
(3) U.S. Trust Company, N.A. 515 South Flower Street, Los
Angeles, CA 90071 (records relating to its function as sub-adviser to the
California Tax-Exempt Income Fund).
(4) Edgewood Services, Inc., Clearing Operations, 5800
Corporate Drive, Pittsburgh, PA 15237-5829 (records relating to its function as
distributor).
(5) Chase Global Funds Services Company, 73 Tremont Street,
Boston, Massachusetts 02108-3913 (records relating to its function as co-
administrator and sub-transfer agent).
-15-
<PAGE>
(6) Federated Administrative Services, Federated Investors
Tower, Pittsburgh, PA 15222-3779 (records relating to its function as co-
administrator).
(7) The Chase Manhattan Bank, 3 Chase MetroTech Center, 8th
Floor, Brooklyn, NY 11245 (records relating to its function as custodian).
(8) Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496
(Registrants' Articles of Incorporation, Bylaws, and Minute Books).
Item 31. Management Services
-------------------
Inapplicable.
Item 32. Undertakings
------------
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest available Annual Report to
Shareholders upon request and without charge.
-16-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 (the "1933
Act") and the Investment Company Act of 1940, Excelsior Tax-Exempt Funds, Inc.
certifies that it meets all of the requirements for effectiveness for this Post-
Effective Amendment No. 25 to its Registration Statement pursuant to Rule 485(b)
under the 1933 Act and has duly caused this Post-Effective Amendment No. 25 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Philadelphia and the Commonwealth of Pennsylvania on the 29th day of
July, 1998.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
Registrant
*Frederick S. Wonham
---------------------------
Frederick S. Wonham, President and Treasurer
(Signature and Title)
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 25 to Excelsior Tax-Exempt Funds, Inc.'s Registration Statement on
Form N-1A has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*Frederick S. Wonham Chairman of the July 29, 1998
- -------------------- Board, President
Frederick S. Wonham and Treasurer
*Joseph H. Dugan
- --------------------
Joseph H. Dugan Director July 29, 1998
*Donald L. Campbel
- --------------------
Donald L. Campbell Director July 29, 1998
*Wolfe J. Frankl
- --------------------
Wolfe J. Frankl Director July 29, 1998
*Robert A. Robinson
- --------------------
Robert A. Robinson Director July 29, 1998
*Alfred Tannachion
- --------------------
Alfred Tannachion Director July 29, 1998
*W. Wallace McDowell, Jr.
- -------------------------
W. Wallace McDowell, Jr. Director July 29, 1998
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*Jonathan Piel
- --------------------
Jonathan Piel Director July 29, 1998
*Rodman L. Drake
- --------------------
Rodman L. Drake Director July 29, 1998
</TABLE>
* By: /s/ W. Bruce McConnel, III
----------------------------
W. Bruce McConnel, III, Attorney-in-Fact
-18-
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and said attorney
shall have full power and authority, to do and perform in the name and on behalf
of the undersigned in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney may
lawfully do or cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Alfred C. Tannachion
--------------------------
Alfred C. Tannachion
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Donald L. Campbell
--------------------------
Donald L. Campbell
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Joseph H. Dugan
---------------------
Joseph H. Dugan
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Robert A. Robinson
---------------------------
Robert A. Robinson
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Wolfe J. Frankl
---------------------
Wolfe J. Frankl
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR FUNDS
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints W.
Bruce McConnel, III his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in his capacity as director/trustee or officer, or both, to execute
amendments to Excelsior Funds, Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s,
Excelsior Institutional Trust's and Excelsior Funds' (collectively, the
"Companies") respective Registration Statements on Form N-1A pursuant to the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended (the "Acts") and all instruments necessary or incidental in connection
therewith pursuant to said Acts and any rules, regulations, or requirements of
the Securities and Exchange Commission in respect thereof, and to file the same
with the Securities and Exchange Commission, and said attorney shall have full
power and authority, to do and perform in the name and on behalf of the
undersigned in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney may
lawfully do or cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Frederick S. Wonham
--------------------------
Frederick S. Wonham
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR FUNDS
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s, Excelsior Institutional Trust's and
Excelsior Funds' (collectively, the "Companies") respective Registration
Statements on Form N-1A pursuant to the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended (the "Acts") and all
instruments necessary or incidental in connection therewith pursuant to said
Acts and any rules, regulations, or requirements of the Securities and Exchange
Commission in respect thereof, and to file the same with the Securities and
Exchange Commission, and either of said attorneys shall have full power and
authority, to do and perform in the name and on behalf of the undersigned in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that either of said attorneys may lawfully do or
cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Rodman L. Drake
----------------------
Rodman L. Drake
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR FUNDS
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s, Excelsior Institutional Trust's and
Excelsior Funds' (collectively, the "Companies") respective Registration
Statements on Form N-1A pursuant to the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended (the "Acts") and all
instruments necessary or incidental in connection therewith pursuant to said
Acts and any rules, regulations, or requirements of the Securities and Exchange
Commission in respect thereof, and to file the same with the Securities and
Exchange Commission, and either of said attorneys shall have full power and
authority, to do and perform in the name and on behalf of the undersigned in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that either of said attorneys may lawfully do or
cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ W. Wallace McDowell, Jr.
-------------------------------
W. Wallace McDowell, Jr.
<PAGE>
EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR FUNDS
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s, Excelsior Institutional Trust's and
Excelsior Funds' (collectively, the "Companies") respective Registration
Statements on Form N-1A pursuant to the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended (the "Acts") and all
instruments necessary or incidental in connection therewith pursuant to said
Acts and any rules, regulations, or requirements of the Securities and Exchange
Commission in respect thereof, and to file the same with the Securities and
Exchange Commission, and either of said attorneys shall have full power and
authority, to do and perform in the name and on behalf of the undersigned in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that either of said attorneys may lawfully do or
cause to be done by virtue hereof.
Dated: May 22, 1998 /s/ Jonathan Piel
-------------------
Jonathan Piel
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(10) Opinion of Counsel
(11) (a) Consent of Drinker Biddle & Reath LLP.
(b) Consent of Ernst & Young LLP.
(27) (a) Financial Data Schedule -- Tax-Exempt Money Fund.
(b) Financial Data Schedule -- Intermediate-Term Tax-Exempt Fund.
(c) Financial Data Schedule -- Long-Term Tax-Exempt Fund.
(d) Financial Data Schedule -- New York Intermediate Term
Tax-Exempt Fund.
(e) Financial Data Schedule -- Short-Term Tax-Exempt Securities
Fund.
(f) Financial Data Schedule -- California Tax-Exempt Income Fund.
<PAGE>
EXHIBIT 10
LAW OFFICES
DRINKER BIDDLE & REATH LLP
PHILADELPHIA NATIONAL BANK BUILDING
1345 CHESTNUT STREET
PHILADELPHIA, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
July 29, 1998
Excelsior Tax-Exempt Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913
Re: Excelsior Tax-Exempt Funds, Inc. - Shares of Common Stock
---------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Excelsior Tax-Exempt Funds, Inc., a Maryland
corporation (the "Company"), in connection with the registration by the Company
of its shares of common stock, par value $.001 per share, under the Securities
Act of 1933, as amended.
The Articles of Incorporation of the Company, as amended and supplemented (the
"Articles of Incorporation") authorize the issuance of 14,000,000,000 shares of
common stock. The Board of Directors of the Company has the power to classify or
reclassify any authorized but unissued shares of common stock into one or more
classes of shares and to divide and classify shares of any class into one or
more series of such class. Pursuant to such authority, the Board of Directors
(i) has previously classified 10,500,000,000 of such authorized shares into
eighteen classes (the "Classes"), each Class representing interests in a
separate portfolio of investments (the "Portfolios"), and (ii) has classified
each Class of shares into one or more series of shares (the "Series"). The
Classes and Series are referred to herein as "Shares". The Board of Directors
has previously authorized the issuance of Shares to the public. Currently, the
Company is authorized to issue Shares of the following Classes and Series:
Portfolio Authorized Shares
- ----------- -----------------
Tax-Exempt Money Fund
A Shares................... 1,500,000,000
A-Special Series 1 Shares.. 1,000,000,000
A-Special Series 2 Shares.. 500,000,000
<PAGE>
Excelsior Tax-Exempt Funds, Inc.
July 28, 1998
Page 2
Portfolio Authorized Shares
---------- -----------------
Intermediate-Term Tax-Exempt Fund
B Shares............................... 500,000,000
B-Special Series 1 Shares.............. 500,000,000
B-Special Series 2 Shares.............. 500,000,000
Long-Term Tax-Exempt Fund
C Shares............................... 500,000,000
C-Special Series 1 Shares.............. 500,000,000
C-Special Series 2 Shares.............. 500,000,000
New York Intermediate-Term Tax-Exempt Fund
D Shares............................... 500,000,000
D-Special Series 1 Shares.............. 500,000,000
D-Special Series 2 Shares.............. 500,000,000
California Tax-Exempt Income Fund
E Shares............................... 500,000,000
E-Special Series 1 Shares.............. 500,000,000
E-Special Series 2 Shares.............. 500,000,000
Short-Term Tax-Exempt Securities Fund
F Shares............................... 500,000,000
F-Special Series 1 Shares.............. 500,000,000
F-Special Series 2 Shares.............. 500,000,000
Unclassified Shares......................... 3,500,000,000
--------------
TOTAL.................................. 14,000,000,000
We have assumed that, prior to the issuance of shares of common stock (the
"Class G Common Shares") representing interests in the New York Tax-Exempt Money
Fund, the Board of Directors will adopt resolutions designating, classifying,
establishing and authorizing the issuance and sale of Class G Common Shares to
the public, and that all necessary filings and actions will be made and taken
under Maryland law.
We have reviewed the Articles of Incorporation, Amended and Restated By-Laws
(the "By-Laws"), resolutions of its Board of Directors and shareholders, and
such other legal and factual matters as we have deemed appropriate. We have also
reviewed the Company's Registration Statement on Form N-1A under the Securities
Act of 1933 (the "Registration Statement"), as amended through Post-Effective
Amendment No. 25 thereto.
This opinion is based exclusively on the Maryland General Corporation Law and
the federal law of the United States of America.
<PAGE>
Excelsior Tax-Exempt Funds, Inc.
July 28, 1998
Page 3
We have also assumed the following for this opinion:
1. Shares have been, and will continue to be, issued in accordance with
the Company's Articles of Incorporation and By-Laws and resolutions of the
Company's Board of Directors and shareholders relating to the creation,
authorization and issuance of Shares.
2. Shares have been, or will be, issued against consideration therefor
as described in the Registration Statement, and such consideration was, or will
have been, in each case at least equal to the applicable net asset value and the
applicable par value.
3. The number of outstanding Shares has not and will not exceed the number
of Shares authorized for the particular Class or Series.
4. The Class G Common Shares will, upon issuance, be and will continue to
be, issued in accordance with the Company's Articles of Incorporation and By-
Laws and resolutions of the Company's Board of Directors and shareholders
relating to the creation, authorization and issuance of the Shares.
5. The Class G Common Shares will be issued against consideration therefor
as described in the Company's prospectuses relating thereto, and such
consideration will have been in each case at least equal to the applicable net
asset value and the applicable par value.
6. The number of outstanding Class G Common Shares will not exceed the
number of Class G Common Shares authorized.
On the basis of the foregoing, it is our opinion that (i) Shares outstanding
on the date hereof have been validly and legally issued and are fully paid and
non-assessable by the Company and (ii) any Shares or Class G Common Shares
issued and sold after the date hereof will be validly and legally issued, fully
paid and non-assessable by the Company.
<PAGE>
Excelsior Tax-Exempt Funds, Inc.
July 28, 1998
Page 4
We hereby consent to the filing of this opinion as an exhibit to Post-
Effective Amendment No. 25 to the Company's Registration Statement on Form N-1A.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
----------------------------------
DRINKER BIDDLE & REATH LLP
<PAGE>
Exhibit (11)(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statement of Additional Information that is
included in Post-Effective Amendment No. 25 and Amendment No. 27 to the
Registration Statement (Nos. 2-93068; 811-4101) on Form N-1A of Excelsior Tax-
Exempt Funds, Inc. under the Securities Act of 1933 and the Investment Company
Act of 1940, respectively. This consent does not constitute a consent under
Section 7 of the Securities Act of 1933, and in consenting to the use of our
name and the reference to our Firm under such caption we have not certified any
part of the Registration Statement and do not otherwise come within the
categories of persons whose consent is required under Section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/S/ DRINKER BIDDLE & REATH LLP
-------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
July 29, 1998
<PAGE>
EXHIBIT (11)(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in each Prospectus and "Financial Statements" and "Independent
Auditors" in each Statement of Additional Information and to the incorporation
by reference in Post-Effective Amendment Number 25 to Registration Statement
(Form N-1A, No. 2-93068) of Excelsior Tax-Exempt Funds, Inc. of our report dated
May 8, 1998 on the financial statements and financial highlights included in the
1998 Annual Reports to Shareholders.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
July 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> TAX-EXEMPT MONEY FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 1,460,119,976
<INVESTMENTS-AT-VALUE> 1,460,119,976
<RECEIVABLES> 7,962,247
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 59,515
<TOTAL-ASSETS> 1,468,141,738
<PAYABLE-FOR-SECURITIES> 67,444,700
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,165,994
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<PAID-IN-CAPITAL-COMMON> 1,396,667,188
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<SHARES-COMMON-PRIOR> 1,070,048,369
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (136,156)
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 1,396,531,044
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,478,393
<OTHER-INCOME> 0
<EXPENSES-NET> (5,584,176)
<NET-INVESTMENT-INCOME> 37,894,217
<REALIZED-GAINS-CURRENT> (24,067)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 37,870,150
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (37,894,205)
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<NUMBER-OF-SHARES-SOLD> 4,454,235,468
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<SHARES-REINVESTED> 1,926,989
<NET-CHANGE-IN-ASSETS> 326,844,825
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (112,089)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 6,211,589
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<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.032
<PER-SHARE-GAIN-APPREC> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> INTERMEDIATE-TERM TAX-EXEMPT FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 265,410,829
<INVESTMENTS-AT-VALUE> 278,603,400
<RECEIVABLES> 3,900,150
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 12,004
<TOTAL-ASSETS> 282,515,554
<PAYABLE-FOR-SECURITIES> 10,379,944
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,119,773
<TOTAL-LIABILITIES> 11,499,717
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 259,532,003
<SHARES-COMMON-STOCK> 28,580,318
<SHARES-COMMON-PRIOR> 26,787,923
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,708,737)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,192,571
<NET-ASSETS> 271,015,837
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,712,543
<OTHER-INCOME> 0
<EXPENSES-NET> (1,464,258)
<NET-INVESTMENT-INCOME> 11,248,285
<REALIZED-GAINS-CURRENT> 3,134,713
<APPREC-INCREASE-CURRENT> 6,670,419
<NET-CHANGE-FROM-OPS> 21,053,417
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,925,984)
<DISTRIBUTIONS-OF-GAINS> (322,255)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,372,050
<NUMBER-OF-SHARES-REDEEMED> (4,644,039)
<SHARES-REINVESTED> 64,384
<NET-CHANGE-IN-ASSETS> 26,965,560
<ACCUMULATED-NII-PRIOR> (46)
<ACCUMULATED-GAINS-PRIOR> (4,843,450)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 879,660
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,598,567
<AVERAGE-NET-ASSETS> 251,365,166
<PER-SHARE-NAV-BEGIN> 9.11
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.48
<EXPENSE-RATIO> 0.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> LONG-TERM TAX-EXEMPT FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 139,553,434
<INVESTMENTS-AT-VALUE> 147,895,480
<RECEIVABLES> 2,331,045
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 6,074
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<OTHER-ITEMS-LIABILITIES> 697,434
<TOTAL-LIABILITIES> 697,434
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141,187,001
<SHARES-COMMON-STOCK> 14,908,458
<SHARES-COMMON-PRIOR> 11,449,983
<ACCUMULATED-NII-CURRENT> 55,607
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (49,489)
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 149,535,165
<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> (936,437)
<NET-INVESTMENT-INCOME> 5,590,649
<REALIZED-GAINS-CURRENT> 1,490,047
<APPREC-INCREASE-CURRENT> 6,969,186
<NET-CHANGE-FROM-OPS> 14,049,882
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,521,851)
<DISTRIBUTIONS-OF-GAINS> (1,575,066)
<DISTRIBUTIONS-OTHER> 0
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<NUMBER-OF-SHARES-REDEEMED> (2,807,996)
<SHARES-REINVESTED> 83,665
<NET-CHANGE-IN-ASSETS> 41,608,713
<ACCUMULATED-NII-PRIOR> 29,622
<ACCUMULATED-GAINS-PRIOR> (7,283)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,030,445
<AVERAGE-NET-ASSETS> 128,977,380
<PER-SHARE-NAV-BEGIN> 9.43
<PER-SHARE-NII> 0.44
<PER-SHARE-GAIN-APPREC> 0.71
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> (0.12)
<RETURNS-OF-CAPITAL> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
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<INVESTMENTS-AT-VALUE> 149,219,257
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<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,660,436
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 526,119
<TOTAL-LIABILITIES> 21,286,008
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 127,126,569
<SHARES-COMMON-STOCK> 14,940,460
<SHARES-COMMON-PRIOR> 12,106,702
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (32)
<ACCUMULATED-NET-GAINS> (283,646)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,450,864
<NET-ASSETS> 131,293,755
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,587,962
<OTHER-INCOME> 0
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